3 Forced-Savings Hacks That Beat Over-Withholding for a Big Refund
There’s a reason people get so excited about their tax refunds every year. Who wouldn’t be thrilled to get a big check? But the dopamine hit of a hefty tax refund comes with a cost: Receiving a large tax refund typically means you’ve overpaid your taxes during the year, essentially giving Uncle Sam an interest-free loan.
For some people, having too much money withheld from their paychecks may seem like a savings hack; after all, they can’t spend money that isn’t immediately available to them. But there are more effective ways to force yourself to save than giving money to the government that could have gone toward your own financial goals during the year.
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To learn more about smarter savings hacks, MoneyLion talked with Elisabella Ricca, a consumer analyst at TopCashback.
Why You Should Adjust Your Withholding
Ricca reiterates that a hefty tax refund isn’t the win so many people think it is. She points to data from the IRS showing that the average tax refund during the 2024 filing season was just over $3,100.
“That means the average person could have had an extra $250 in their monthly paycheck to use or invest,” she said. “For some, this is a very significant amount.”
It’s a meaningful sum for many Americans, which is why adjusting your withholding to better match what you actually owe can make sense — as long as you don’t swing too far in the other direction and end up with a big bill.
This may require a shift in perspective, but it’s worth it, Ricca said: “Americans need to stop viewing their tax refund as a bonus or free money.”
Wondering how to figure out what you should withhold? Ricca suggests using the IRS Tax Withholding Estimator, a free online tool designed to help taxpayers dial in a more accurate amount.
Hack No. 1: Auto-Transfer to a High-Yield Savings Account or Money Market Account
Once you’ve freed up that extra cash each month, Ricca recommends automating transfers to a high-yield savings account — or, in some cases, a money market account — on the same day your paycheck hits. She notes that a high-yield savings account is often the easiest option because it offers competitive interest rates with fewer hoops.
“A money market account earns interest similar to a high-yield savings account, but it often has minimum balance requirements,” she said. “While still liquid, transfers may take a day or two, making it less tempting to immediately dip into.”
This approach offers the best of both worlds: You reduce impulse spending while earning interest on your own money instead of letting it sit with the IRS all year.
Hack No. 2: Boost Your 401(k) Contributions
Another forced-savings strategy Ricca suggests is increasing your contributions to your 401(k) or other retirement plan.
“You can automate the transfers, and these accounts generally can’t be accessed without penalties until retirement age,” she said.
With this approach, the money vanishes from your paycheck before you can spend it — much like over-withholding — but with a major upside: Your savings can grow through compounding. Even better, higher retirement contributions may also reduce your taxable income, depending on the type of account.
Hack No. 3: Put It Toward High-Interest Debt
Ricca describes over-withholding as a form of opportunity cost. Think about how that extra money could chip away at credit card balances or personal loans.
By automatically routing that cash toward debt repayment, you’re essentially earning a guaranteed, risk-free “return” equal to the interest rate you’re avoiding — while setting yourself up for a more secure financial future.
The Bottom Line
Over-withholding can get you a large tax refund every year, but that money often functions more like a sugar rush than a true windfall, especially when you consider that there are more effective ways to save. Try these savings hacks to make sure your money works for you all year long — not just at tax time.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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