Early tax filing may help retirement saving

Participants use tax refunds for financial priorities, so the earlier they file, the sooner they may increase contributions.

Good intentions for tax refunds

More than 100 million Americans received a tax refund in 2018, with an average refund of $2,778.1 In January, Americans had good intentions to use their refund money for financial priorities: 41% said they’d save some or all of it, and 40% said they’d use the money to pay off debt.2

Refunds used for savings and debt payments

Good news! Intentions generally mirrored actions. When asked in May, 35% of those who received a refund said they saved some or all of the money, and 36% said they used their refunds to pay off debt.3 Across the board, adding to savings and paying down debt were the most oft-cited uses of tax refund money.

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Men and women who received a tax refund were nearly equally likely to save it, but women’s intentions were more closely aligned with their actions. Among women, 38% said they planned to save some or all of their refunds, and 36% actually put their refunds toward savings.4 By comparison, 43% of men said they planned to save some or all of their refunds, but only 35% did so.5

Looking across age and race/ethnicity, we see that some groups were much more likely to save some or all of the refund, and some groups were much more likely to use the refund to pay down debt.

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Plan loans seldom used for tax payments

What if people owed instead of getting a refund? The good news here is that a workplace retirement plan loan was one of the least cited methods of paying a tax bill. Only 3% planned to use a retirement plan loan if they owed money, and only 3% reported they did.6

Opportunity for retirement plan education

Despite Tax Day sales and other temptations, only 13% of U.S. adults say they used their tax refunds to purchase something for themselves.7 It seems that suggestions to use tax refunds for financial priorities are getting through.

Messages around putting tax refunds into retirement plans may be increasingly effective. You can explain the benefit of filing earlier by calculating the cost of one or two months of interest on the refund amount. Filing earlier means more time for their savings to grow for themselves, not for the IRS. They may give their retirements an extra boost!

Take advantage of tax season, when taxes are top of mind, to highlight various retirement-related topics. Communication efforts may highlight increasing contributions, the differences between pretax and Roth contributions, the tax consequences of taking a withdrawal or cashing out, ways to use retirement plan contributions to lower tax burdens or stay in a lower tax bracket, and the impact of increased pretax contributions on take-home pay.

1 IRS, Filing Season Statistics for Week Ending May 11, 2018, www.irs.gov/newsroom/filing-season-statistics-for-week-ending-may-11-2018, May 17, 2018, and IRS, Filing Season Statistics for Week Ending May 4, 2018, https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-may-4-2018, May 17, 2018.

2 CivicScience, civicscience.com, data gathered January 22, 2018, to January 29, 2018.

3 CivicScience, civicscience.com, data gathered May 1, 2018, to May 4, 2018.

4 See notes 2 and 3.

5 Ibid.

6 Ibid.

7 CivicScience, civicscience.com, data gathered May 1, 2018, to May 4, 2018.