This post is part of my Freaky Financial Fridays series, where I argue a case from an opposing view, generally in contradiction to my own philosophy or conventional financial advice.

Most financial planners and personal finance bloggers warn against having a large income tax return.  They argue that overpaying throughout the year is equivalent to giving the government an interest free loan.  While you might be better off keeping the money within your control, there are still some benefits to getting a large tax return, particularly during tough financial times.

Many People Don’t Save

If you were to have less withheld from each paycheck, you would get a smaller return at the end of the year.  If you were to save or invest the extra money you received in each paycheck, then a large refund could be a bad thing.  But many people don’t save.  More money in each paycheck would mean more to spend each week.  Configuring your withholding to get a large refund effectively forces you to save throughout the year.  Yes, you’re basically saving at zero percent interest and inflation makes your money less valuable when it is finally returned to you.  But isn’t it better to save something at 0% than nothing at a higher percent?  Of course it is.

Small Savings Returns

When online savings accounts were offering 5% interest, your interest free loan to the government seemed pretty bad.  But now rates are down around 2% and many brick and mortar banks are offering even less.  So the difference between what you’re saving at versus alternative savings is much less of an issue.

Worse Investment Returns

As bad as interest rates are on savings accounts, investment returns have generally been even worse.  If you are a dollar cost averaging investor like me, you would have been making regular investments during the past year.  Assuming that the extra money withheld from your paycheck would have been added to your investments, how would you have done?  Here are the returns for a typical periodic investment from 2008:

The net effect of all of these declines was a return of -35%.  So loaning money to the government at 0% is a poor choice, but would look brilliant compared to losing 35% had you invested the money received throughout the year.

Owing Taxes Stinks

The reason I receive a modest tax return now, versus manipulating my withholding to owe nothing and be refunded nothing is that I owed taxes one year.  Worse than just having to come up with the money to pay, I was also hit with a penalty and forced to pay estimated taxes for the following year.  I’d rather receive a lot than owe a lot.

Depending on how you handle your finances, receiving a large tax return may actually be a good thing.  If you have trouble saving through another method or if your investments with the money would do poorly, then a case can be made for receiving a large tax return.  It just goes to show you that the conventional wisdom doesn’t apply to every situation.

For instructions on how to increase (or decrease) your paycheck withholding, which will result in a larger (or smaller) refund, see my post Paying Less in Taxes.