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Smart Ways to Use Your Tax Refund
That feeling when your refund hits your bank account.
Filing taxes is never fun, but for many people it means getting at least a small refund from the IRS. In fact, roughly 75% of tax filers get at least some amount back when they file their taxes.1
For tax year 2022, the average refund amount was $2,753.2 While the amount varies from year to year, getting those funds deposited to your account is a great feeling.
No denying, all of us are tempted to spend our tax refund on something fun in the short term. But what about putting at least some of it towards some long-term goals too? Let’s take a deeper look at how to help make the most of your income tax refund.
This information is not tax or investment advice. You should consult with a tax advisor and/or a qualified investment professional for advice specific to your particular circumstances.
Key Takeaways
The IRS owes you a tax refund if your total tax withholdings for the year exceed what you owe for the tax year.
Using your tax refund strategically may help set you up for long-term financial success.
Common options for these funds include building savings, paying down debt, or financing a major purchase.
What Is a Tax Refund?
Throughout the year people pay taxes to the federal government. Employees do this through tax withholdings from their paychecks, and self-employed people make quarterly payments for their estimated taxes owed.
A tax refund is essentially a reimbursement from the government for paying more in taxes than you needed to.3 On the other hand, if you paid less than what you owed, you won’t receive a refund and you need to pay the balance by Tax Day.4
What to Do with Your Tax Refund
If you receive a refund from the IRS, you don’t have to rush and spend it on the first thing that catches your eye. Instead, consider using your refund in one of these ways.
Boost Your Savings
You may choose to deposit your refund in a high-yield savings account (HYSA). These accounts earn higher rates than traditional savings accounts, which may help your savings grow significantly over time.
Even better, by placing the funds in a HYSA, you’re creating a building block for the future (that could grow too). If you’re saving for a big purchase like a home or a new car, putting your refund toward that savings goal may be a great choice.
Start or Grow Your Emergency Fund
Emergency funds help ensure that you have savings on hand to cover unexpected expenses when they pop up. If you don’t have an emergency fund, you could use your tax refund to start one. And if you already have an emergency fund, you could use your tax refund to increase your cushion.
Remember, experts recommend having between three and six months of living expenses saved in an emergency fund.5
If your tax refund isn’t enough to reach that goal, you may want to make additional contributions until you have a proper safety net.
Add to Retirement Savings
Roughly half of the working adults in the U.S. don’t have retirement savings.6 If you’re one of them or worried about the amount you’re currently contributing not being enough, you could use your tax refund to save for retirement.
Consider opening or adding to a traditional or Roth IRA. You could open an IRA at any time, even if you already have a 401(k) through your employer. Once the account is open, you may deposit the money from your tax refund.7
Save for Education
College costs are on the rise, with tuition and fees at large public universities increasing an average of 158% in the last 20 years.8 With those rates expected to continue rising, saving for your child’s education now could be a great move.
You could use your tax refund to open or add to a 529 account for your child to help them pay for college. The sooner you start, the more time you have to save before your child graduates.
Pay Down Debt
If you’re currently tackling debt, using your tax refund to speed up repayment may be a great option. Remember, credit card debt often has high rates and paying down what you owe could reduce the amount of interest you pay over time.
Are you one of the nearly one-third of Americans who went into debt during the holiday season? On average, people rack up more than $1,500 in debt for holidays. Using your tax refund to pay down (or even pay off) that debt could be worthwhile.9
Invest the Funds
If you don’t have much in the way of debt and already have a good amount of savings set aside, you may choose to invest your refund. Investing in the stock market could help grow your money over time. The market has an average return on investment (ROI) of 10% per year.10
If you don’t want to invest in the stock market, you may choose to purchase bonds or certificates of deposit (CD) to help grow your wealth. A unique use for tax refund money is purchasing I bonds.11 I bond purchases are limited to $10,000 per person, per year, however tax refunds may be used to buy up to an additional $5,000 in paper I bonds, meaning a person could purchase a total of $15,000 in I bonds each year.12
Of course, it’s always a good idea to speak with a qualified financial advisor before you make any investment moves. They’re able to help you figure out which investments are worth your time based on your unique financial situation.
Upgrade Your Home
Using your tax refund on home improvements may be a great way to put the money to use, especially if you’re planning on selling your home in the near future. Invest in upgrades that may help you get a higher asking price for your home, such as creating a designated home office space or replacing outdated elements which may make your home more attractive to prospective buyers.
If you’re planning on staying in your home, consider upgrades that benefit you and your household more directly. For example, you may choose to add a new bedroom if your family is growing or transform the basement into a finished hangout space for older teens.13
Help Those in Need
Donating your tax refund money is another great option. Choose a charity or cause that you’re passionate about. Even better, your donation may be tax deductible next year!14
Treat Yourself
Using your refund to treat yourself is perfectly acceptable. After all, you work hard and you deserve to reward yourself.
Consider using your refund to pay for or help cover the cost of a weekend away to rest and recharge. Or splurge on a new tech gadget that you’ve had your eye on. Just make sure you’re not going into debt as you do so!
Final Thoughts
Ultimately, your tax refund is income you’ve already earned. And it’s up to you to decide how you want to use it. While focusing on paying down debts and building up your savings is certainly beneficial to your long-term financial health, using your tax refund to treat yourself may be the choice that speaks to you.
Regardless of what you spend your tax refund on, make sure it’s something you feel good about. And if you’re interested in using that money to jump start your savings with market-leading rates, consider opening a savings account with Jenius Bank today.