A big refund feels good, but getting more of your money throughout the year may feel better

Guest:	Mike Meese
Title:	President of Armed Forces Mutual
Summary:	Many federal employees treat tax refunds as a bonus, even though they reflect pay that could have arrived earlier with different planning. In a moment when many families are reassessing work, finances, and long‑term decisions like college, timing and strategy matter.

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Terry Gerton All right. We have passed the April 15th tax filing deadline. Maybe people are wiping their brow and sighing in relief that they got their taxes in. But the next step is to think about tax refunds and people that have been promised big ones this year. If you get a big tax refund, how should you think about planning for that financially?

Mike Meese Well, it’s a great question, because actually, even last year before the larger refunds this year, last year, the average refund was $3100. And that’s enough to erase four months of credit card debt for the average person that has credit card interest. So if you’re going to get a refund back, first things you want to do is look at where do you have debts that you should be paying off, for example, and the first place to start is credit card debt, so I would use your tax refund to pay that off. And if you don’t have credit card debt, then that’s the time to potentially start an emergency fund. So that if you do have something, a car repair or something like that, you can pay for that directly and not have to go into debt in those cases.

Terry Gerton That’s a very sensible approach, but that’s not how most people think about their tax refund. It’s like a vacation fund or a shopping excursion.

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Mike Meese That’s right, and again, hopefully you’re in a circumstance where you don’t have a lot of credit card debt. If you’re fortunate in those kinds of positions then you should go ahead and spend that because, you know, the government’s been withholding that money for a long time. You’ve been depriving yourself of a little bit of what you could spend that money on, so you may want to spend that on yourselves. What I encourage people to do is kind of do the two-thirds one-third rule. Take two-thirds of that refund, let’s say it’s $3,000, put the $2,000 into longer term savings, either your thrift savings plan, your 401k, something that will help you in retirement and may reduce your taxes next year if you put it into one of those tax advantaged accounts, and then spend one-third and increase, go out to dinner, help contribute to your family vacation so that you can take advantage of at least one third of that tax refund, if you don’t need to pay off credit card debt.

Terry Gerton Mike, sometimes people think about this taxpaying approach as a forced saving so that they do get that big income. But given the affordability challenges that so many people are facing, doesn’t it make more sense to recalculate your withholding so that that money stays in your pocket on a monthly basis and doesn’t go to the government?

Mike Meese Yeah, especially when we see higher gas prices and higher costs across the board. You probably want more of that money now, and especially you don’t want to put that stuff on credit card debt. So you’re paying that money and then paying interest on top of that. To do that, now is a good time. If you got a large tax refund, it probably means you’re withholding too much. You can go to the irs.gov calculator and they have a complete withholding calculator where you put in all of your facts, all of the details, and it’ll explain how much you should be withholding out of every paycheck so that you are withholding the right amount at the end of the year. And then if it turns out that you’re withholding too much — and again, this is important for especially for couples when you have two different employers — if both of you say that you are withholding married with two kids or whatever, you may end up being withholding more money than you should be. You can then go back to your employer and change using the form W-4 so that you are withhold less money. Let me mention especially for federal employees. You could also use any retired pay. So for example, I retired from the military and so I adjust the tax withholding with the Defense Finance and Accounting Service so that it withholds the right amount of both state taxes. And federal taxes to get that as close to zero as possible so that you’re not withholding too much money.

Terry Gerton I’m speaking with Mike Meese. He’s president of Armed Forces Mutual. Mike, at this time in the spring, not only are people thinking about taxes, but many families are also thinking about college decisions. Their high school seniors are making decisions about colleges and also about financial aid. So walk us through some of the programs for military and veterans and families that can help defray some of college expenses.

Mike Meese Well, the most valuable one for people that are in the military is the post-9/11 GI Bill. That provision under Chapter 33 of the VA Code provides for 36 months of benefits for either a service member, or while they’re on active duty, if they’ve had more than six years, they can transfer that to their spouse or to their dependent children. And it’ll pay for 36 months of in-state tuition at any college or university within the United States. It also provides for housing allowance equal to the basic allowance for housing for an E-5 in that area, as well as a stipend for books. So it’s a huge advantage that people should consider taking advantage of.

Terry Gerton And you said that also applies to spouses?

Mike Meese It does. The important thing is while you’re on active duty, you have to transfer it to your spouses and children. Let me explain a little bit about how that works. You have 36 months. So in my case, I had two daughters. I transferred 18 months to each of those two daughters as long as you transfer at least one month to somebody you can always move that around. So by transferring 18 months to each daughter, if one of them ended up not needing the money, I could transfer it over to the other child. In my case, I ended up having them go to University of Connecticut, George Mason University, and so that that worked out very well. And because they also pay for the housing allowance, that actually gives you a little bit more money that you can stretch that further. One other really important tip that people don’t realize is that sometimes there’s extra money left over. So when your child graduates, call up the VA, and you have to call them to find out, are there any months left? After both of my daughters graduated, I found out I have actually four and a half months left of tuition. So at some point I may wanna go take some night school classes just to take advantage of that benefit that I have.

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Terry Gerton Well, the GI Bill is a federal program. Do states also have veteran assistance programs for tuition?

Mike Meese They do, especially in Virginia. One of my other things that I do is I work with George Mason University as the rector of the Board of Visitors there. And all Virginia schools has the Virginia Military Survivors Independence Education Program. For any Virginia military person who is 90% disabled, or has a purple heart or has died due to their wounds or in combat, all of their spouses and children are eligible to go tuition-free to any Virginia college, and so it’s a huge advantage that people can and should take advantage of, especially with the great public colleges that we have in Virginia.

Terry Gerton And so for veterans and military families in other states, they should check with that state to see if there are similar programs?

Mike Meese Exactly. And the other thing that people should consider doing, whether you’re in the military or not, is savings through 529 programs. The federal 529 program allows you, it’s kind of like a 401k for education. You put money in, and then it grows tax-free. And As long as it’s used for a valid educational expense, it comes out tax-free. The advantage, if you’re in either Maryland or Virginia, is all of that money that you put in there comes off of your taxes. So I’m saving right now for, now I’m up to eight grandchildren. And I love my grandchildren every month, but especially on April 15th, all of the money that I contributed to their eventual college education came off of my Virginia State taxes. So saved me money on April, 15th as well.

Terry Gerton Might be another good spot for your tax refund.

Mike Meese Exactly. And money that goes in there, you never pay taxes on it when it comes out, as long as it’s used for a valid educational purpose. And again, similar to the post 9-11 GI Bill, if one child doesn’t need it because they get a scholarship or they go to a service academy, you can always transfer that money to the other children. And in the new Secure Act, you could even give that to them to help them start with their own 401K.

Terry Gerton Mike, is there a central repository or website where folks can go to kind of get a comprehensive list of all of these programs?

Mike Meese They’re kind of spread out. We have a lot of very good stuff on our website, on our resource center at American Armed Forces Mutual Aid Association dot com, so AAFMAA.com. If you look under there, under college resources, that can provide a lot this information as well as for the VA programs like the post-9/11 GI bill, the VA.gov is very good. And, Virginia also has that, if you look up just ‘Virginia Military Survivors & Dependents Education Program,’ you can find that on their website.

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