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?