I have been giving financial advice for 20 years now, and each new idea that passes through our political system continues to baffle me on how we are going to help our fellow Americans over the long haul. The latest and greatest coming up this tax season is that the Government plans to pilot a program where they issue prepaid debit cards instead of cutting paper checks to taxpayers who get a refund this year.
Here’s the scoop. About 600,000 low – and moderate – income taxpayers nationwide, a slice of those earning about $35,000 or less annually, will receive letters inviting them to activate a debit card that can receive direct deposits. (source: wsj.com) The program is expected to cost the Government about 1.5 million dollars, and the Government plans to recoup a bunch of the money by charging half (about 300,000) of the taxpayers a $4.95 fee to be able to get the prepaid debit card. If the programs works well, it is expected in future years that money could actually be made on the program when comparing the cost of cutting a paper check (roughly $1) vs. a direct deposit (roughly .10).
The main issue driving this is that the FDIC estimates that about 9 million households do not have a bank account at this time. (source: marketwatch.com). Since the Government is partial owner in some banks already, it does make me wonder whether they will get into some type of banking business for lower income households if they can’t encourage some financial institution providers to work with these types of low income consumers.
The main issue that just doesn’t make sense to me around this is that a ‘refund’ is essentially nothing more than a person withholding more out of their paycheck than they should have during the course of the year. At the end of the year, you get the money back that you overpaid. In reality, most people should have been saving that money in their 401(k) plan at work, a Roth IRA, or some type of bank/investment account. With lower income families who may be behind in their retirement savings, a debit card is only going to feel like a spending card. This means that those $250, $500, or $1,000 refunds are going to get quickly spent on clothing, eating out, or some other consumption item. What we need to do is figure out a way where those people can have a secondary election in this type of program to either take the debit card or have the dollars directly deposited into an IRA, Roth IRA, or some investment account.
Having done thousands of budgets for people, if you put cash into someone’s hands they are likely to spend it. While debit cards sound like a good idea, at least paper checks make you go through an additional step of depositing the money before you actually spend the money. This may make you think twice before you spend it on something you don’t need. Adding a direct deposit investment account alternative may actually help some of these folks save for future goals so they don’t have to 100% depend on Government programs down the road.
If the pilot is successful from the Government’s perspective, I guess you too will be able to have your refund just one swipe away!
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
Phone 1.800.355.9318 or 770.777.0427
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