In defense of a tax refund (Or, why it's really not so bad to overpay your taxes)

Now that companies have mailed out the last of their W-2s, it's time to brace ourselves for the annual scolding by the mainstream personal finance media.

What did we do this time? Well, if we can count ourselves among the 107 million or so Americans expecting a refund, we should not be pleased with our windfall (an average of $2,429 last year, thank you very much). No, we should be ashamed and sorry: we have committed the cardinal sin of making "an interest-free loan to the government."

Heard those words before? From the L.A. Times in 1991 to the Motley Fool last year, this is one of the biggest cliches of personal finance journalism. (Mea culpa: I've written it too.) We tend to think of our refunds as "free money," the argument goes, when actually, any refund we get represents taxes we've overpaid. If instead of getting that $2,429 all at once, we adjusted our withholding to pay precisely the right amount, we'd have an extra $200 a month to save. We could earn interest! Get rich! But no, we'd rather hand that money over to the government, so we can get a refund in the spring. Silly, silly us.

Oh, please. That's a great argument in theory. But few of us live such theoretically perfect, economically rational lives, says Peter Tufano, a professor of financial management at Harvard Business School who has studied tax refunds and savings behavior. Saving money is hard, and we're more likely to fritter away a small increase in our weekly paycheck than we are to save it up for a new laptop or an IRA contribution. But get a big check in the mail, "and you really have to think about it," he says. "You might spend $10 a week on mochaccinos, but if you get a $500 check at the end of the year, you're not likely to spend it the same way."

Furthermore, Tufano points out, interest rates are horrendously low right now. Even the most generous savings accounts are only paying around 1.45 percent these days. So that interest you're foregoing? Less than $20 a year on the average refund. For that $20, though, you get a guarantee that, without even thinking about it, you'll have saved money at the end of the year. People spend a lot more than that for programs that help them maintain discipline in other parts of their lives, whether they want to lose weight (a year of WeightWatchers: $215.40), quit smoking (three months of Nicorette: $405), or train for a marathon (12 weeks of online coaching with Marathon Matt: $480). In contrast, that interest-free loan to the government — or, as I like to think of it, my national savings plan — seems like a bargain.