Stephen Wallick December 20, 2017 No Comments

The IRS W-4 form is the form you are asked to complete when you begin a new job. This form provides your employer with the information they need to withhold the correct amount of taxes from your check. Most people never think of this form again, but it is a good idea to review your W-4 from time to time. If this form is incorrectly filled out or outdated, you could be missing out on money that could be investing.

Mistakes on Your W-4 Help Uncle Sam

Many people choose to fill out their W-4 in a way that results in more taxes being withheld from their check than is necessary. The theory being that the more taxes that are withheld, the larger the refund each year. You are permitted to complete the W-4 any way you choose, claiming to be single when you are actually married, or claiming only one dependent when you actually have many. The IRS doesn’t mind, because this is actually giving them an interest free loan for the year!

On April 15, you may be happy that you’ve gotten a large tax refund, but in reality, you can earn more money throughout the year. You can use your W-4 as a money-making tool. If you reduce the amount of taxes that are withheld from our check, you can use this extra money throughout the year to invest. Investments, like a 401(k), can you earn money for you, rather than for the IRS! 

Why Minimize Your Tax Refund?

You may like the idea of getting a check form the IRS every year, but there is a money-making opportunity lost when you allow the IRS to hold your money. A more strategic and beneficial option would be to redirect that money to a 401(k). 401(k) contributions through your employer are made pre-tax. Also, many employers will match a percentage of what you contribute. If you increase your 401(k) contributions, you are actually reducing your tax liability while increasing your retirement savings. It is a win-win situation!

Review Your W-4 Regularly

It is important to review your W-4, and it is wise idea to do this annually. Your W-4 should be adjusted to your current salary and lifestyle.

Specific events that would call for making changes to your W-4 form would be:

  • If you have a change in marital status; if you get married or divorced or are widowed, you may want to change your withholding status.
  • If you get a raise; consider adjusting your withholding so you can contribute to your 401(k) account.
  • If you’re approaching retirement; within five years of retirement, it may be worth maximizing your retirement savings.
  • If you receive a large tax refund; this is the number foremost reason to review your W-4.
  • If you have more than one job, carefully consider each W-4 form you fill out. You may want to have more money withheld from a second job than from your primary job. For instance, if you have a second weekend job that brings a low salary, you would want to withhold at the higher rate because it will only tax that portion of your salary.
  • If you receive a large refund from the IRS, consider what you could be doing with that money instead. There is nothing to be gained by giving the IRS access to an interest-free loan. Many people earmark their refund for a vacation or other large purchase. But consider your future, your retirement savings.
  • If you redirect that large refund to a 401(k), you are growing your savings, and that savings is growing!
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