How to put your tax refund to good use

NEW YORK The average federal tax refund is more than $3,000, according to the latest data from the IRS.

Since the majority of tax filers get a refund, there’s a fair chance you could get hundreds if not thousands of dollars back in overpaid taxes, especially if you’re also owed a refund from your state government.

That money may feel like a windfall, and it’s easy to squander it on a lot of little things.

But if you’re looking to improve your current financial situation, here are seven ideas to consider. Well, technically six, but you’ll enjoy the seventh the most.

The average tax refund is over $3,000. Here are 7 ways to put it to good use

Making the best use of any tax refund you get from Uncle Sam or your state government requires some prioritizing of goals.

1. Pay off high-rate debt

If you are carrying a balance on your credit card and are paying 20% to 30% in interest, make this your first priority to pay down.

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At such sky-high rates, “the debt can grow faster than you can pay it off,” said Eric Bronnenkant, a certified financial planner and head of tax at Betterment, a robo-advisory financial services firm that also has a human advice team on hand to help clients.

Keyana Russ, a certified financial planner at Four Ponds Financial Planning, concurred that people’s awareness of how much money they’re paying in interest over time doesn’t always register.

“What I usually see is people paying the minimum, or they’re charging everyday expenses and not paying off the bill at the end of the month. … They don’t understand how much interest they’re paying,” Russ said.

For example, if you’re carrying a $3,000 balance at 27% interest and you only pay a required minimum of $97.50 every month, it will take you 240 months (which is 20 years) just to pay off the $3,000 — and, in addition, you will have paid $3,044.57 in interest, for a total of $6,044.57, according to’s calculator.

2. Create or add to an emergency fund

You can use your refund to start or bolster an emergency fund.

When it comes to costly emergencies, there are many Americans who don’t have at least three months’ worth of living expenses set aside, let alone enough to easily handle an unexpected bill of $1,000.

Be sure to stash the money in a high-yield savings account at an FDIC-insured bank, Russ suggested, noting that the best interest rates are typically offered by online banks.

If you have high-rate debt and you’re lacking emergency savings, Russ suggested you might use a portion of your refund to attack your debt and the other portion to create an emergency fund.

Bronnenkant favors paying off the high-rate debt first, but, if you’re low on emergency savings and need a critical repair to help keep your job — such as on your car — he said it might make sense to set aside money for that repair and put the rest toward your credit card or other high-rate debt.

3. Make an extra payment on your mortgage

If you’re carrying a mortgage at a high rate (e.g., 7% to 8%), and you’re not saddled with credit card debt, you might consider making an extra payment or two. “It can make a difference in the long run towards your principal,” Russ said. 

You can even view it as an additional form of savings, in the sense that you’re saving yourself an extra 7% or so in interest on the portion of the principal you’re paying down, Bronnenkant noted.

4. Invest in a Roth IRA

If your income qualifies you to contribute to a Roth IRA, you can contribute up to $7,000 this year ($8,000 if you’re at least 50) with after-tax savings. That money will grow untaxed until retirement, at which point your withdrawals will be tax-free and penalty-free after age 59-1/2, assuming the account has been open for at least five years.

(And note: You can still make a 2023 Roth contribution until April 15 this year. The contribution limit is $6,500, or $7,500 if you’re age 50 or older.

Bolstering your tax-free retirement savings is great. But if you need to access some of your money well before you retire, you may take out any part of your contributions tax-free and penalty-free at any time, Bronnenkant said. You would only be taxed and penalized if you withdrew the earnings on your contributions before age 59-1/2.

(For more information on Roth IRA withdrawal rules, here is an easy-to-understand rundown from Charles Schwab.)

5. Contribute enough to your 401(k) in 2024 to get your full employer match

Speaking of retirement savings, if you’re not yet contributing enough to your 401(k) to get the full match from your employer, a refund can make that easier.

Say you get $3,000 back. You can put that money in a high-yield savings account to earn interest. Then, on your workplace 401(k) site, change your paycheck contribution levels so that by the end of the year you will have contributed $3,000 more in pre-tax money than you otherwise would have.

For instance, say you’re paid every two weeks and you have 20 more paychecks left until the end of the year. You can boost you biweekly contributions by $150 per paycheck ($150 x 20 = $3,000).

“You want to get the max match from your employer,” Bronnenkant said.

6. Invest for shorter-term goals

If in the next three to 10 years you expect to buy a home, take a once-in-a-lifetime trip, renovate a room, send your kids to summer camp or have any other expensive goal, you might consider investing your refund in a diversified mix of low-cost, broad market index funds.

The shorter term your goal is, the less risk you want to take. If you need the money within three years, you might consider putting your refund in certificates of deposits and US Treasury bonds.

But if your goal is five to 10 years out, and you’re comfortable taking on some more risk and are willing to accept fluctuations in the market, Bronnenkant said, you might put no more than 30% of your refund in a stock index fund and 70% in a total market bond fund if your risk tolerance is conservative; or 50% in each if you have a moderate risk tolerance.

If you plan on sending your child to college and you have a 529 plan, you can use your refund to boost your contributions to that plan, Russ said. You may also get a tax break for your contribution depending on the state where you live.

7. Have some fun

Unless you’re in truly dire financial straits, if you get a large refund, you might set aside a small portion to do whatever you truly enjoy.

“Sometimes you just want to have fun and not have it be all business,” Russ said. “You can set aside some of the money to have fun.”

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