Many people only adjust their W-4 for withholding when they begin new jobs.  However, if you received a tax refund this year, that means it’s time to make some adjustments.  Many people seem to think that taking more than they need out of their paychecks is good practice and a pretty good savings plan.  They couldn’t be more wrong.

Allowing the IRS to withhold more than you need to is the same as loaning money to someone for 0%.  And it doesn’t take a financial guru to figure out how good of a savings plan that is.  There are several options for much better savings plans.  ING Direct is currently paying over 4%.  Loaning your money through Prosper.com can pay more than 10%.  If your worried about spending that money right away instead of getting it all in lump sum in April, set up a automatic deduction or transfer out of your normal bank account and into a savings.  Make it as automatic as a tax deduction and you won’t notice it.  And it will still be there in April.
So adjust your W-4 already!  You really should do it every year.  Make it a part of your tax preparation eah year.  You’re already working on all the numbers so do that little bit more.  You could net yourself an additional 4% or more!

The IRS has a handy withholding calculator that helps you decide what to put on the W-4.

Categories: Tax