Make my tax refund retirement

Tax season is the second largest spending season of the year: Second only to winter holidays. Rather than spend the tax refund before you get it, think about the future. Need a step-by-step guide to retirement?

It is never too early to plan for retirement. The landscape of the world of retirement accounts changes as you reach retirement age. Tax benefits begin to disappear. Tax implications become more plentiful. Retirement is the practical application of "A penny saved is a penny earned."

Begin your road to retirement by exercising wise economic choices: Buy a house you can afford, spend wisely on cars, stay out of consumer debt and maintain a healthy credit report. All of these choices build big retirement muscles.

Set your retirement goals. Calculate your current yearly expenses, including utilities, property taxes, car expenses and food budget. Do not include your mortgage interest payment, but do include your principal. Double the total to estimate how much income you will need to retire. Multiply that by the number of years you will be retired. This will be your target savings amount.

Talk to an investment counselor for help in gauging your risk tolerance, income security, dividend reinvestment and portfolio aggressiveness.

I am 20. Is it too early to start saving?

You cannot start too early. The more you do now, the less you will need to do later.

Enroll in a 401(k) plan with your employer with matching contributions or begin a retirement account. Contribute the pre-tax maximum ($15,500) to your retirement. Learn to tailor your expenses to the money you bring home. You are learning to control money better.

401(k) is not enough. If you work thirty years contributing $15,500 per year, your nest egg before dividends will be $465,000. This may sound like a lot today, but when you retire, you will only have $31,000 per year to cover all of your expenses. How much did you need again?

Discuss with a financial adviser or investing consultant whether your needs will be best served with an individual retirement account (IRA), a mutual fund account or a stock portfolio or a combination.

Do not spend tax refunds. You lived without that money all year. Instead of spending it recklessly, invest the entire refund into your retirement. You will be saving more money than your employer is investing in your 401(k).

Assess your risk tolerance. How much are you willing to gamble with your investments? Consider higher risk investments with larger dividends to grow your money faster. At this age, you will be more resilient to market losses than you will in a few decades.

I am 30. Should I change what I am doing?

You are beginning to build equity in your home. How does this affect your saving?

Keep reading. The advice continues through age 60!

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Tax refund exploitation

America has fallen for the instant tax refund. Are you being exploited? Yes. How?

The advent of the "instant tax refund" was designed to target low-income workers by H & R Block in the 1980s. The outline of the profitability of the program was very clear.

Traditionally, the users of tax preparers were high-income earners with complicated tax returns. 1984 saw the largest graduation of certified public accountants (CPA) in American history. Market research predicted that if tax preparation companies did not target a wider range of clientele, they would become obsolete within a decade, due solely to the glut of competition.

With a huge amount of venture capital, H & R Block launched the "Instant Tax Refund Loan", touting that users could have their checks in as little as three days. The focus of the ad campaign was young families with small children. Not one commercial featured a business suit.

Within three years, satellite "offices" cropped up in shopping malls, and the word "loan" disappeared. The instant tax return was born. Now, younger people and seniors joined the ad campaigns.

Traditional tax preparers, most notable being Jackson Hewitt, signed long term contracts with major retailers like J.C. Penney, Rent-a-Center and Wal-Mart to host their tax preparations. With access to break rooms, preparers were instructed to entice the employees, some of the lowest paid workers in the United States.

Retailers would take the next step and cash the checks in the knowledge that the holder would shop before leaving. This was no noble gesture on the part of tax preparers or retailers. The unprecedented success of the project was complete.

An army of attorneys had carefully drafted the contract between the earner and the preparer. Fine print included clauses of default and error: Should the return be reduced for any reason, notwithstanding preparer error or earner negligence, earner will be responsible for reimbursement of monies distributed and payment of all fees and interest thereon.

Translation: If the preparer makes an error that results in the earner not receiving a refund, the earner must repay the money, exorbitant interest and a handling fee for the error. Bear in mind that the check was not the actual tax refund, but only a loan against what the tax refund would have been.

So where is the $3 billion in profit? In interest and fees: Interest rates vary from an annual percentage rate of 70% to 1700%. The average prepared tax return is $2,000, with a fee of $250. 12% of all of the refunds are going into the pocket of the preparer and the lender.

The IRS states that the average income for 79% "instant refunds" is less than $35,000. 57% of those who got "instant refunds" filed for the earned income credit (EIC) which provides financial assistance to the working poor. Without a doubt, making $1.7 billion from the lowest paid workers in the country is truly designed to exploit.

References: National Consumer Law Center, Internal Revenue Service, Consumer Federation of America, Consumer Affairs, Attorney General for California, Attorney General for Illinois, Attorney General for Washington

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