Pros and cons of tax refund prepaid cards

By Michelle Crouch

Expecting a tax refund, but don't have a bank account? Don't worry. Just about every tax preparer this year is offering to load your tax refund onto a reloadable prepaid debit card.

Getting your refund on a prepaid card offers several advantages over a paper check:

• You get your money faster, in as little as eight to 10 days.
• It eliminates the possibility of your check being lost, stolen or returned to the IRS as undeliverable.
• And you can avoid check cashing fees that typically range from 2 percent to 3 percent and could add up to more than $60 for the average $3,000 refund. 

Consumer advocates, however, say it's important to shop around. While the cards can be a good alternative for Americans who don't have traditional bank accounts, they can cost you plenty in fees if you're not careful.

"A lot of these cards don't have upfront costs, but they have fees for using it with a PIN in a store or for withdrawing funds. You can even be charged for calling customer service," says Michelle Jun, senior attorney for Consumers Union, the nonprofit publisher of Consumer Reports. "Before you choose a card, you need to really look to make sure it won't sting you on the back end."

Here's a look at the fees charged on cards issued by the four top tax preparers (story continues below):

Big-name tax preparers Turbo Tax, TaxAct, Jackson Hewitt and H&R Block all offer their own version of the tax refund prepaid card. This is the second year that Turbo Tax has offered a prepaid card to its customers, said company spokeswoman Colleen Gatlin. "We had a lot of customers telling us they wanted to do direct deposit, but they didn't have a bank account," Gatlin said.

Other prepaid card users don't feel comfortable sharing their bank account number online or simply want to keep their tax windfall separate from their other cash, Gatlin said. "You could split your refund and say, 'I'm going to set aside X amount on a card for a plasma TV.'"

H&R Block, which has offered the cards for five years, is offering an incentive to clients who get their refund on Block's prepaid Emerald card before Feb. 4 this year: a free refund-anticipation check. That could be especially appealing to those who want to pay their tax preparation fees out of their refund before they get their card, says Chi Chi Wu, staff attorney at the National Consumer Law Center, and it's smart alternative to refund anticipation loans, which are quickly becoming obsolete.

	If you get a tax refund, how will you receive it? The old-fashioned way: a paper check. Direct deposit. Prepaid card. I wish I was getting a refund. I usually have to pay. Vote Getting poll results. Please wait...

The IRS tried to get into the prepaid card business. In a 2011 pilot program, the Treasury Department offered low-cost federal prepaid debit cards to 800,000 Americans likely not to have a bank account so they could load their tax refunds on the cards. But only about 2,000 -- less than 1 percent -- ultimately signed up for the program, said Treasury Department spokesman Matt Anderson. Not surprisingly, the program won't be offered this year.

Experts note that you don't need to get a prepaid card from the IRS or from a tax preparer. Most of the prepaid debit cards and payroll cards available today have an account number and routing number that you can use when you do your tax return to have your refund deposited onto it. "So if you already have a card with low fees and good protection, go ahead and use that instead of getting a special one from your tax preparer," says Chi Chi Wu, staff attorney at the National Consumer Law Center.

Otherwise, she said, it's a good idea to shop around. Here are some tips for choosing and using a prepaid card for your tax refund:

Read the fine print. Read the "cardholder agreement" and watch out for monthly fees, transaction fees and inactivity fees, which can add up fast. Check to see whether there's a charge to call customer service or to check your balance. Will it cost money to load the card or to use it at an ATM?

Direct deposit your paycheck. If you plan use the card long-term, have your paycheck directly deposited onto the card. Otherwise, you'll pay up to $4.95 to make in-person deposits at local retailers.

Choose signature transactions. When in doubt, always choose "credit" not "debit" when using the card in a store. Some cards charge a fee for each PIN-based transaction.

Get cash back. To avoid ATM fees, get cash back when you shop at grocery stores or other retailers, and check your balance online or by phone.

Open a bank account instead. In most cases, a bank account is a lower-cost option and offers better liability protection than a prepaid card. "If you really want to keep your refund money separate from your other cash, open a savings account," Wu advises. "Then instead of paying fees, you may even be able to make some money if the account pays interest."

See related: How (and when) to use credit cards to pay taxes, Don't take the refund anticipation loan bait

Published: January 30, 2012

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