With my 2008 Roth IRA fully funded with about 20% of the money coming from my federal and state tax refunds, I decided that I would rather have more of my money now to fund the Roth IRA than give it to the government. The tax refund I received this year was the result of three deductions for payroll tax purposes. I just submitted paperwork to increase the number of W4 withholding to four to keep more of my own money.
What are my plans for this money?
Since I used the tax refund to contribute to my Roth IRA, I will use the increase in net pay to add to my monthly contributions to my Roth IRA. I have been planning on increasing my monthly contributions each time I receive a merit increase. However, with the economy, I have decided rather than counting on a pay raise, I will just have to live with the income I have. With a change in withholding, I can give my Roth IRA a boost and if I receive a pay raise, then I can contribute even more toward my Roth IRA.
I estimate that I should add ~$700 to my Roth IRA contribution this year by changing my payroll withholding.
What are the drawbacks of doing this?
If tax laws change, I may owe more than I anticipated for 2009. My quick calculations based on my 2008 tax returns indicate that I should owe the federal government somewhere between $0-$200, depending on my itemized deductions and credits. Despite decreasing the amount of money withheld, it does not affect my state income tax much at all. Therefore, I anticipate that my state tax refund for 2009 should cover the cost of any federal taxes I owe with a small amount leftover.
If the tax brackets change or I earn more than I did in 2008 or any number of financial or life changes, I might regret changing my withholding. Frankly, I will have to see what happens when I figure my 2009 taxes next year.
My strategy is to get more money in my pocket now for a planned Roth IRA contribution rather than loaning it to the federal government interest-free. I earned it and I would like to put my money to work for me. Are you changing the amount withheld from your payroll check based on your tax refund?