Where You Should Never Put Your Tax Refund

Written by |

Tax season is one of the most anticipated times of the year – if you’re getting a tax refund. How you decide to get your money is very important, says money expert Clark Howard.

Many tax preparation companies siphon cash from your tax return by offering to put your money on prepaid debit cards or even gift cards. Clark says don’t do it!

Do Not Put Your Tax Refund on a Prepaid Debit Card

H&R Block advertises that it can give you your tax return in minutes if you open an account for an Emerald Prepaid Mastercard®. What’s the catch? They charge you a boatload of fees. 

Here are some fees you’ll pay,  according to the H&R Block fee schedule.

  • 4% of your refund check for expedited funding.
  • $4.95 for a cash reload.
  • $3 out-of-network fee for ATM withdrawal.
  • $35 over-the-counter withdrawal fee.

The company is also partnering with Amazon to offer a gift card that comes with a 2% bonus when you do your federal taxes with H&R Block Basic software.

“They’ll tell you all kinds of tall tales about how it’s the greatest thing ever to get your refund on one of these cards,” Clark says.

“What they won’t tell you — at least not in large print — is that you will be subject to a lot of junk fees,” Clark says. “Fee on top of fee on top of fee and it’s just terrible how you get ripped off.”

That’s not to say that all tax prep firms that offer tax refunds via debit card exact heavy fees, but many of them do, so Clark wants you to do your research.

Do Not Put Your Tax Refund on a Gift Card

As for a tax refund tied to a particular retailer’s gift card, Clark says: “Could there be a worse idea?”

Here are two of Clark’s biggest issues with gift cards:

  • They turn real money that can be used anywhere into what he calls “fake money” because there are conditions and restrictions on using it.
  • Along with tax scams, there are too many gift card scams going around these days.

Here Are the Best Things To Do With Your Tax Refund

Clark says you should get your tax refund in your hands the cheapest way possible (and free is the cost from the IRS), but then what should you do with that money?

1. Pay Down Debt

A tax refund may be just the boost you need to make some serious headway toward paying off your credit card debt and getting caught up financially.

“Mathematically, you pay off debt quicker if you do the avalanche method,” Clark says. “Typically, you’ll reduce your overall interest that you pay by 10% or more by attacking the highest interest rate debt as solidly as you can and then working your way down.”

Read our guide on how to get out of credit card debt.

2. Open a Roth IRA

If you’re not in debt, consider opening a Roth IRA, which is a retirement account that allows you to deposit post-tax money and withdraw it later tax-free.

“I have been the man from Roth forever,” Clark says. “I’m obsessed with the Roth as a way to save for retirement.”

Read our guide on saving for retirement.

Final Thoughts

Clark says you shouldn’t actually want to get a tax refund: That’s just lending your money to the federal government for free. Read how you can bring your refund as close to zero as possible.

But if you do get one, see it as an opportunity to do something smart with your money.

“Neither of those [paying off debt or funding a Roth IRA] is about spending,” Clark says. “They are both about improving your financial outlook.”

Want more ways to save on doing your taxes? Read our guide on federal and state tax filing services.