Pros and cons of tax refund prepaid cards
Expecting a tax refund, but don't have a bank account? Don't worry. Most tax preparers this year are offering to load your tax refund onto a reloadable prepaid debit card.
If you lack the option of getting your refund via direct deposit, getting it on a prepaid card offers several advantages over a paper check:
- You get your money faster, possibly in as little as 10 days. However, if you claimed the Earned Income Tax Credit or the Additional Child Tax Credit, the IRS now must hold your refund until Feb. 15, due to a new law.
- It eliminates the possibility of your check being lost, stolen or returned to the IRS as undeliverable.
- You can avoid check-cashing fees that might be a flat charge of $5 to $10, or a percentage. A 2 percent fee could skim $60 off the average refund of a little over $3,000.
If you decide to go with a prepaid card, consumer advocates say it's important to shop around. The cards can be a good alternative for Americans who don't have traditional bank accounts, but they can cost you plenty in fees if you're not careful, says Joe Valenti, director of consumer finance for the Center for American Progress.
“That’s part of your tax refund that’s going into the bank’s pocket,” he says.
The good news is that prepaid cards are improving, according to Consumer Reports, which reviewed and rated 20 cards (including H&R Block’s prepaid card) on value, safety, fee transparency and convenience in 2016. And in October 2016, the federal Consumer Financial Protection Bureau finalized new prepaid card rules that protect consumers and require more transparency about costs.
Big-name tax preparers H&R Block, Jackson Hewitt and Liberty Tax Service all offer their own version of the tax refund prepaid card. TaxAct used to have its own branded card, but in 2016 began offering refunds on the American Express Serve prepaid card instead. And TurboTax, which also had its own card, switched to a non-branded NetSpend card several years ago.
Here's a look at the fees charged on cards issued by the four top tax preparers (story continues below):
Not all prepaid cards offered by tax preparers are created equal, says Christina Tetreault, a staff attorney on Consumers Union’s financial services program team. “Some are no or very low fee and have great features,” she says. “Others are relatively high fee, plus may come with dangerous features such as overdraft.”
If you want to get your taxes prepared and pay your preparation fee out of your refund, rather than upfront, your refund must be routed through the tax preparer first so they can take their cut. In this case, getting your refund on a card allows you to avoid a high fee for opening a special account with the tax preparer and having your refund deposited into that account. For example, H&R Block charges $34.95 for opening an account for a federal refund transfer, which you don’t pay if you have your refund put on a card.
Also, H&R Block is offering a free, 0 percent interest refund advance loan of up to $1,250 to qualifying clients in 2017. If approved, you get the cash within 24 hours after you apply. Your tax prep fees and the loan get repaid from your refund, and you can have the rest of your refund placed on the card.
A no-fee loan like the one offered by H&R Block may be a way for consumers who now have to wait until Feb. 15 to get their refunds to get their hands on their money early.
Fee-free loans like this are different from “bad,old” tax refund anticipation loans (RALs) that charged sky-high fees, says Chi Chi Wu, staff attorney at the National Consumer Law Center.
The downside is that you have to pay for tax preparation, which is fine if you planned to do so anyway, but not a good deal if you otherwise would have prepared your taxes for free, she says.
Consider getting your own prepaid card
Experts note that you don't need to get a prepaid card 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.
“You can definitely use your own prepaid card,” Wu says. "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.”
This year, some cards not affiliated with tax preparers are courting consumers by offering incentives to get a tax refund on their card. For example, Green Dot is offering a $25 reward when you get a federal tax refund of at least $2,500 deposited onto a Green Dot card.
And RushCard is running a contest that will double the tax refunds of 15 randomly chosen winners. However, Consumer Reports did not recommend RushCard in its 2016 report due to problems reported by consumers and a resulting investigation by the CFPB.
“It’s more important to try to pick a card with lower fees that will save you money rather than be entered into a contest,” Wu says.
Choosing and using a
prepaid card for your tax refund
Prepaid cards charge fees that may include monthly fees, over-the-counter withdrawal fees and more, so it’s smart to compare costs. 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, ATM 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 to pay bills online?
Consider how you plan to spend your refund. Look at the fees in relation to how you plan to spend your refund, Valenti says. For example, if you plan to make regular small withdrawals from ATMs, ATM fees could add up, he says. If you plan to keep the money on the card for a while to save it for a big purchase, an inactivity fee could take a chunk of your refund.
Don’t forget about state refunds. If you’re also expecting a state refund, know that some states no longer issue paper checks and, if you don’t do direct deposit or get your money on your own card, the state may issue your refund on its card. Many of these cards have very high fees, Valenti says.
Get cash back. To avoid ATM fees, get cash back when you shop at grocery stores or other retailers, and check your balance online to avoid getting dinged for ATM balance inquiries.
Look for benefits. When you read the fine print, also look out for perks. For example, American Express Serve cards, including those offered by Jackson Hewitt and TaxAct, offer purchase protection, a benefit that will replace or repair an item recently purchased with the card if it gets damaged, lost or stolen. You can’t use the benefit if you don’t know you have it.
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."
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