It’s tax time and when it comes to my taxes, I’m on the
fence about how to adjust my withholding's.
Do I increase my allowances so that I get a nice fat check come March or
do I do I decrease my allowances so that I break even at the end of the
year? I understand the arguments on both
sides, yet with today’s savings rates, here I sit…on the fence.
If I claim Married 2 (as opposed to the Married 4 I claim
now), I’ll be giving the government an interest free loan over the course of
the year. At what cost? I would be giving the government extra $60
dollars a pay period and at current interest rates (0.84% available at Ally Bank)
compounded daily, I would earn a grand total of $12.10 for the year.
If I were to invest that $60 a month in a mutual fund, say
one following the S&P 500 Index, last year I would have earned $0(I may
have even lost money considering the big downturn in August!). However, the same money, with a return of 8%
would yield a $63.95 return. A return of
$12 makes me to want to lend it to the government so that come March and receive
a large check.
The ever popular, and helpful, pro/con list(or pro/pro list as the case is
here):
Break even Pros:
- Bigger paycheck and therefore more monthly cash flow.
- Earn interest by saving on my own.
Big Refund Pros:
- Nice windfall once a year.
- Forced savings.
I think for the time being we’re going to try to get a big
tax refund. Since interest rates aren’t
enticing me at all and we save 15% for retirement as it is, a nice little
windfall to increase our emergency fund, pay down or mortgage, splurge a little
or even all three is worth it right now.
If monthly cash flow seems to get tight and I can’t squeeze anything
else out of the budget, I can always adjust my withholding's later.
How do you manage your withholding's?
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