The CFPB Study to Plan Your Tax Savings

A study on tax savings released in September by the Consumer Finance Protection Bureau shows that with a little bit of encouragement, even taxpayers with the very lowest income can become savers.

This is an important message for all of us. If you want to become a saver but never seem to find those extra quarters under the couch cushions, planning to save a portion of your tax refund is a great way to get started.

DFPB noted in the study that previous research has found a majority of taxpayers already have a plan on how they will spend their tax refund, so it’s important to get into that savings mentality now.

About the Tax Savings Study

CFPB partnered with H&R Block to conduct the field study during the 2017 tax season because H&R Block had a large potential base of customers to run the experiment.

H&R Block identified a base of just over 250,000 customers who had provided an email address, who had done business with the company within the previous three years and who held an Emerald Card, which is a general-use, re-loadable prepaid card offered by H&R Block. Customers can have their tax refund loaded to the card and also are free to add funds at any time. Customers have the option to add an ePocket feature to the card that sets aside money in a non-interest savings account.

Through a random sampling, H&R Block divided the customers into three groups — a control group that did not receive an email, an encouragement group who received an email encouraging them to open an ePocket feature, and an incentivized group who were offered a $5 bonus if they opened an ePocket feature. An email was sent to the encouragement and incentivized groups on December 28, 2016, so it was received before tax filing season, during that time when consumers might be thinking about how to spend their refunds.

A smaller subset of the study group, about 73,000 participants, also agreed to share their de-identified tax information with CFPB, including income, tax refund amount, date of filing and whether they claim such credits as Earned Income Tax Credit or Saver’s Credit.

Results of the Tax Savings Study

Though the participation was low, CFPB felt there was enough participation to reach some conclusions.

First, only 608 participants ended up opening an ePocket feature and depositing money into the account during the tax filing season, between Feb. 1 and May 1, 2017.

But the numbers did reflect a boost in the email groups. In the control group, only 0.18 percent deposited to the ePocket, compared to 0.23 percent in the encouragement group and 0.29 percent in the incentivized group.

The average contribution into the savings feature during tax season was $1,131. Surprisingly, but maybe not so surprisingly, the group that saved the most was the control group at an average of $1,342. The encouragement group saved an average of $1,266, while the incentivized group saved only $842 on average. We say not so surprisingly because the people who set up the savings without any email obviously were motivated to save on their own, whereas the incentivized group was acting to get the $5.

The study also tracked the balances on the accounts through all of 2017, and found little statistical difference in the three groups on how they used the money through the course of the year.

Almost half of the savers had withdrawn the money by March, though by December, about a quarter of participants still had money in their savings. The average balance by December had dipped to about $100.

How Can You Use this Information?

This might just seem like a lot of data about a bunch of other people, but it can serve as encouragement for those who have not been savers in the past.

A 2018 study by the Federal Reserve Board found that 39 percent of those surveyed would need to borrow money or sell something to cover a $400 emergency expense, or not be able to pay the expense at all.

But in 2017, some 73.2 percent of taxpayers received a refund, and the average amount was $2,771. For low-income earners, those who qualify for Earned Income Tax Credits, that refund average goes even higher.

This means tax refund season provides a great opportunity for even the lowest-income Americans to begin a savings habit. The IRS also makes it easy by allowing those who receive a paper check to buy savings bonds or, even better, direct your refund in up to three different account, including savings accounts.

Even if you start with a small amount, say enough to cover that $400 emergency expense, you’d still have something to play with or to use to catch up on bills.

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