Pros and cons of tax refund prepaid cards

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:

  • Speed: You get your money faster, possibly in as little as 10 days. 
  • Security: RefundIt eliminates the possibility of your check being lost, stolen or returned to the IRS as undeliverable.
  • No check-cashing fees: You can avoid check-cashing fees that might be a flat charge of $5 to $10, or a percentage of your refund. A 2 percent fee could skim $60 off the average refund of a little under $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.

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. 

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

Monthly service fee None
Activation fee None
ATM cash withdrawal fee $3
Transaction fee None
Dormancy fee $4.95 per month after two months inactivity
Over-the-counter withdrawal fee $35
Other fees ATM balance inquiry $1.50; ATM decline $1.50; Reload at retail location, varies by location up to $4.95; Online/mobile bill pay $.95 per transaction or $2.00 per expedited transaction; Various fees to expedite card loading and payments

Monthly service fee $5 (no fee in NY, TX, VT)
Activation fee None
ATM cash withdrawal fee None at MoneyPass ATMs; $3.50 at other ATMS
Transaction fee None
Dormancy fee None
Over-the-counter withdrawal fee None
Other fees Reload at retail location, varies by location up to $3.95; Cash Pickup service at Walmart up to $9.49; Foreign transaction fee 2.7%

Monthly service fee $5 (or $0 if you choose pay-as-you go plan)
Activation fee None
ATM cash withdrawal fee $2.50 domestic; $4.95 international
Transaction fee None (or $1.00 per transaction if you choose pay-as-you-go plan)
Dormancy fee $5.95 per month after 90 days of inactivity
Over-the-counter withdrawal fee $2.50
Other fees Foreign transaction fee 3.5%; $1 ATM decline fee; $0.50 fee for balance inquiries by ATM, in-person customer service agent or phone; $5.95 to get funds on card sent to you by check; $5 extra or replacement card fee; $15 overdraft fee if you choose optional overdraft protection; $1.00 declined transaction fee

Monthly service fee $4.95 (no fee in NY, TX, VT)
Activation fee None if done online, $3.95 in retail locations
ATM cash withdrawal fee None at Money Pass ATMs; $2.50 at all other ATMs
Transaction fee None
Dormancy fee None
Over-the-counter withdrawal fee none
Other fees Foreign transaction fee 2.7%; Reloads free at over 45,000 locations including CVS and Walmart but cost $3.95 at other locations

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.

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 you can use when you do your tax return to have your refund deposited onto it.

“You can definitely use your own prepaid card,” said Chi Chi Wu, staff attorney at the National Consumer Law Center. “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 giving away 4,000 prizes totaling more than $75,000 when consumers get their refund direct deposited to a Green Dot card. 

And RushCard is running a contest that will triple the tax refunds of three randomly chosen winners. However, Consumer Reports did not recommend RushCard in its most recent study on prepaid cards in 2016 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 “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.”

See related: How (and when) to use credit cards to pay taxesDon’t take the refund anticipation loan bait


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Updated: 12-19-2018