Getting a tax refund from Uncle Sam can be exciting. After all, pocketing more money than you were planning can help you afford what previously seemed out of financial reach, like major home improvements or bucket list travel destinations.
However, before you blow your entire refund, it pays to consider how to use that extra cash to improve your financial future. Let’s look at savvy ways to put your refund to work.
How much is the average tax refund?
Refund amounts vary based on many factors, but indicate the average direct deposit payment was $2,827 last year.
This refund amount is down from $3,099 for the 2022 year due to the expiration of a generous child tax credit and other credits included in the .
Before exploring the best ways to use your tax windfall, it’s worth pointing out that . After all, the IRS is simply giving you your own money back, which serves as an interest-free loan for the government.
If you consistently get issued large refunds, work with a tax adviser to correct your federal tax withholdings so you won’t have to wait for next year’s tax returns to get a big boost to your bottom line.
5 ways to use your tax refund wisely
1. Start an emergency fund
Been meaning to put away some savings but keep getting sabotaged by unexpected bills? A tax refund is the perfect seed money for an emergency savings fund. Emergency savings, sometimes called rainy day funds, can help support your family during a job loss or front the money for unexpected costs like car or home repairs.
How much should you have squirreled away in an emergency fund? Any cash is better than nothing, but putting away savings equivalent to three to six months’ worth of expenses.
2. Add to your savings
Dumping a sizable portion of your refund check into a savings account to keep it safe from impulse buys isn’t a bad idea. But it’s important to remember that not all savings accounts are created equal when it comes to interest rates.
You’ll get more bang for your buck by leaning into , , or a . While those high APYs are a big benefit, there are some drawbacks, such as restricted access to your funds and scheduled minimum deposits. Understanding how these accounts work before adding extra cash to those balances is crucial.
And be sure you choose a bank that’s FDIC insured.
3. Pay off high-interest debt
One of the most valuable things you can do with your refund check is to pay down debt. Eliminating your credit card debt, paying down medical bills, and tackling any other debts with interest in double-digit territory is a solid investment in your financial future.
If you don’t have high-interest debt, you can make extra payments on student loans, a car loan, or even a home loan that you might not otherwise be able to afford.
4. Put your refund check toward retirement
Thanks to the magic of compound interest, putting your refund check into a retirement account is an investment strategy that pays serious dividends. Adding $2,827 (the average refund in 2023) into a typical IRA could turn your refund check into upwards of $20,000 after 25 years.
However, before you decide to use all your extra money to pad your retirement fund, double-check the contribution limits for a traditional IRA, Roth IRA, and 401(k). If you’ve already contributed the maximum, you may want to add funds to your instead.
5. Invest in your financial goals
Take some time to carefully consider your priorities and devote the windfall from your taxes toward your personal finance goals. Some possibilities include:
Frequently asked questions (FAQs)
1. How long does it take to get the average refund?
, they can issue most refunds to taxpayers within 21 calendar days. However, if you mail a paper tax return, that process can take a week or more longer than using the IRS e-file options. Once you’ve filed, you can check your refund status and see if it’s been deposited to your bank account using the IRS tool.
2. How are most Americans spending their federal tax refunds?
The majority of Americans said that rather than save money, they used their tax refunds primarily to pay off debt or put toward existing bills. Only about a third of Americans said they were putting their refund checks in savings.