5 Smart Things to Do With Your Tax Refund

Beth Mayer is a planning excellence consultant at Northwestern Mutual.

According to IRS data, around three-quarters of American taxpayers receive a refund each year. In 2025, the average tax refund was approximately $2,950—about $100 more than in 2024. This year, the average refund check could be even higher. That’s because tax brackets have increased to match inflation, which means more income now falls into lower brackets.

Since there’s a good chance you’ll be getting something back from Uncle Sam this year, you should have a plan for the best way to use that money. Otherwise, you may find yourself spending your refund in a way that doesn’t support your financial goals. Your Northwestern Mutual financial advisor can help you determine the best way to save and grow your money based on your goals and timeline.

What to do with your tax refund

Below, we highlight five smart ways you can use your tax refund to set yourself up for a financially sound 2026.

1. Tackle any high-interest debt

Carrying high-interest debt can make it more difficult for you to achieve your financial goals, especially in today’s interest rate environment. A financial advisor can keep you informed about the current financial environment and when it may make sense to prioritize your debt versus other goals.

If you have high-interest debt, such as a balance on your credit cards, you might consider using your tax refund to pay it down. By reducing or eliminating the amount you pay in interest each month, you’re freeing up future cash in your budget.

But if you use your tax refund to pay the balance off all at once, you can avoid those interest charges—and free up an extra $79 in your budget each month. Putting just a few hundred dollars of your refund toward your balance can lead to big savings in both time and interest charges.

You may be thinking: If carrying credit card debt is so bad, why not cash out some of your retirement fund or other investments to pay it off? While that would lower your balance, it would also come with taxes and, in the case of retirement funds, potential penalties. Using your tax refund to pay down your debt lets you avoid these concerns.

2. Save for a goal

Receiving a tax refund can be a great way to start saving for a bigger goal. For instance, maybe you've been itching to take a trip abroad, or have been thinking about upgrading from your starter home to your dream home. Or maybe you need to start building or boost your emergency fund so you’re prepared for any unexpected expenses. Whatever the goal, the first step is to set aside some money for it.

If you’re saving for emergencies or a short-term goal, meaning something you want to accomplish within a few months or years, consider putting your goal money into a high-yield savings account. This way, the money will be easy to access whenever you need it, and it can still earn interest. Likewise, consider making it separate from the bank where you hold your primary checking account, so you won’t be as tempted to transfer money from your savings to your checking anytime your budget gets tight.

If you’re saving for a long-term goal, such as a down payment on a home that you may want to buy in the next 10 years, consider using an investment account where your money can potentially grow faster with the help of the markets.

3. Boost your retirement savings

Even if you’re already putting money away in a 401(k) or IRA, it never hurts to give your nest egg a little more padding. Because the earlier you start saving, the more time you have to take advantage of compound growth.

If you have $20,000 in an IRA that grows at a hypothetical 6 percent a year, in 20 years you’ll have more than $66,000 in that account, even if you never add to it again. But if you bump that amount up to $22,750, you’ll have just over $75,000 in that same time frame. Putting your tax refund to work today could mean an extra $9,000 in your pocket during retirement.

Contribution limits for 401(k)s and IRAs are occasionally increased to account for inflation.

401(k) contribution limits increased from $23,500 in 2025 to $24,500 in 2026 if you are younger than 50 years old. In 2026, you can make a catch-up contribution of up to $8,000 to your 401(k) if you are 50-59 years old or if you are older than 63 years old. If you’re 60, 61, 62, or 63 years old, your catch-up contribution limit for both 2025 and 2026 is higher: $11,250.

IRA contribution limits increased from $7,000 in 2025 to $7,500 in 2026 if you are younger than 50. Those 50 and older can make a catch-up contribution of up to $1,000 in 2025 and $1,100 in 2026.

4. Treat yourself to a splurge

Yes, you read that right. Setting aside a portion of your refund for a splurge is not only well-deserved, it can also help you stay on track with your other goals.

So, whether that means a fancy dinner for your next date night or an outing with friends, your refund can be used for something fun without having to dip into your everyday budget. In fact, whenever you receive any sort of windfall—such as a bonus or an inheritance—consider setting a percentage aside for discretionary spending so that you get to enjoy some of that money now, and use the rest of it for other goals.

5. Consider other financial goals

If you’ve covered the bases above and still have money left from your refund check, ask yourself whether there are any other financial goals you’ve been shortchanging. Try to think about the goals that really matter to you and consider dedicating at least a portion of your refund toward them.

You may want to save for your child’s future educational costs, start a business, or leave behind a legacy that you can be proud of. If it’s important to you, your tax refund can help you start laying the groundwork toward one day making it a reality.

Define your priorities

Of course, how you decide to use your refund really depends on your situation and what you’re trying to achieve. You might have one particular goal you’re focused on, and that may be where your refund goes. Or you might put the money toward several goals, allowing yourself to enjoy something right now and save for something you’ll enjoy in the future.

Not sure how you should put your refund to work? Your financial advisor can help you understand how the different pieces of your financial plan all fit together and guide you toward the best decision for you.