4 Smart Things to Do With Your Tax Refund

Most years, around three-quarters of Americans receive a tax refund each year. And while the IRS has stated that tax refunds are likely to be smaller this year, there’s still a good chance that you’ll be getting something back from Uncle Sam when you file your taxes.

Ultimately, the best way for you to use that refund will depend on your personal financial situation, goals, and priorities. But some ways are certainly better than others. Here are four smart ways you might choose to put your tax refund to work.

How to Use Your Tax Refund

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, in addition to using it for other goals.

Save for a goal

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 just need to 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 it’s 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 where it’ll be easier to access when you need it. 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 when your budget gets tight.

If you’re saving for a long-term goal, like a down payment on a bigger home that you may want to buy in the next 10 years, consider saving for it in an investment account, where your money can potentially grow faster with the help of the markets. A financial advisor can help you determine the best way to save and grow your money based on your goals and timeline

Tackle any high-interest debt

Carrying high-interest debt can make it more difficult for you to achieve your financial goals, especially in a rising rate environment like the one we find ourselves in today. If you have high-interest debt, like 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.

Let’s say you have a $2,900 balance on a credit card that charges a 20 percent annual percentage rate, and you’ve been putting $200 a month toward paying it down. If you decide to use your refund to pay off the balance all at once, you’ll be saving yourself 17 months of payments and $447 in total interest. Plus, you’ll have $200 each month to use for something else.

Even if you decide to put just $500 of your refund money toward that balance, you’ll be shaving off three months from your payoff timeline, and nearly $150 off your total interest paid. That’s money that can be freed up to put toward other, more fun goals.

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 $64,000 in that account, even if you never add to it again. But if you bump that amount up to $22,000, you’ll have more than $70,500 over that same time frame.

It’s important to note that 401(k) and IRA contribution limits are occasionally increased to account for inflation. In 2023, if you’re younger than 50 you can contribute up to $22,500 to a 401(k) and $6,500 to an IRA. If you’re 50 or older, you can contribute up to $30,000 and $7,500, respectively.

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? A 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.

No investment strategy can guarantee a profit or protect against loss. All investments carry some level of risk including the potential loss of principal invested.