What to Do With Your Tax Refund

Quick Answer

You can use your tax refund to shore up your finances. A typical $3,000 refund can pay down credit card debt, beef up savings or retirement, pay for needed home repairs, start investing or provide the funding you need to invest in yourself.

Happy couple holding up documents, deciding what to do with their tax refunds.

What can you do with your tax refund if you want to do more than just spend it? The average tax refund is about $3,000, enough to make a dent in your credit card debt, build up your savings, do a few home repairs, max out your retirement, start a brokerage account or invest in yourself. For seven smart ways to spend your tax refund and improve your finances, read on.

1. Pay Off Debt

Paying down credit card debt can save you money and improve your credit. Carrying a credit card balance can be costly. According to Experian data, total credit card balances increased to $1.07 trillion in 2023, up $157 billion from 2022. Credit card interest rates are also up: The New York Fed reports the average annual percentage rate (APR) on credit cards was 22.8% in 2023, nearly double the average APR of 12.9% in 2013.

How can paying down credit card debt improve your financial standing?

  • Save money on interest charges: Lowering your credit card balance reduces the amount of debt on which you're charged interest. If you have a nice lump sum from your refund, consider using it to kick off a debt payoff strategy and tackle your debt systematically.
  • Lower your monthly card payment: A lower balance also means a lower minimum monthly payment. If your refund is big enough, you may even eliminate a payment altogether.
  • Improve your credit score by reducing credit utilization: Credit utilization measures the amount of credit you're using versus your total credit lines. Lowering your credit utilization can help raise your credit score—and keep your debt levels healthier as well.
  • Free up available credit so you have it in an emergency: While credit cards are not a substitute for emergency savings, they can be exceedingly handy when you need to pay for a sudden urgent care visit or surprise home repair. Keeping your balance low gives you the cushion you want when you need to pay for something now.

2. Add to Your Emergency Fund

Your tax refund is the perfect seed money for an emergency fund. Although you'll ultimately want to build up three to six months' worth of expenses in an emergency account, starting with a few thousand dollars from your tax refund gives you a huge leg up. Setting this money aside could help you avoid taking on debt should an emergency expense arise. Consider opening a money market account online: They typically pay higher interest rates than regular savings and let you write checks or make debit transactions when you need money in a pinch.

If you already have an emergency fund, now may be a good time to add to it. Expenses have gone up across the board in the past few years, so your emergency savings may not go as far as it once did.

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3. Fund Home Repairs

Have you been putting off home repairs or upgrades? Spending on home improvements declined in 2023 for the first time since 2010, due to price increases, high interest rates and a dip in home sales, according to the Joint Center for Housing Studies of Harvard University. Though postponing expensive repairs may be understandable, using your tax refund to maintain or improve your home can be a good investment in your home's value—and livability.

The same principle applies to your vehicle. If you've been deferring maintenance, use your refund money to keep your car in good running order. You'll save money on repairs over the long haul.

4. Contribute to a Roth Retirement Plan

Contributing to any tax-advantaged retirement account is an excellent use of your tax refund, but refund time can be an especially good moment to consider a Roth IRA or Roth 401(k). Here are a few reasons why:

  • Tax savings: While you can't deduct your contributions to a Roth IRA (as you can with a traditional IRA), money in a Roth account grows tax-free. When you withdraw your money in retirement, your distributions are also tax-free, unlike withdrawals from a traditional IRA. If you're getting a tax refund already, you may get more from the long-term tax benefits of a Roth versus the immediate deduction from a traditional IRA.
  • Flexibility: You don't want to take money out of your retirement savings before it's time, but if you need to withdraw your original Roth contributions before you reach retirement age, you can do so without tax penalty.

In 2024, you can contribute up to $7,000 to a Roth IRA, $8,000 if you're 50 or older. If your employer offers a Roth 401(k) plan, you can invest up to $23,000 in 2024 with a catch-up contribution of $7,500 if you're 50 or older. Your contribution to a Roth 401(k) may come with employer matching dollars that give you an immediate return on your investment. With both a Roth IRA and a Roth 401(k), contribution limits are for combined contributions to Roth and traditional accounts.

5. Grow Your Sinking Funds

Sinking funds are savings you designate for specific purposes. You might create a sinking fund to pay for this summer's vacation or to save for a down payment on a house. Here are a few ideas for funding special projects with a typical tax refund:

  • Use a high-interest savings account to maintain sinking funds. If your bank doesn't provide digital tools to earmark funds for different purposes, use a spreadsheet or personal finance software to track your goals.
  • Open a high-interest certificate of deposit (CD) for funds you want to use in six months, 12 months or a few years.
  • Automate your savings by having a set amount transferred from every paycheck. This allows you to grow your funds throughout the year and cap them off with your refund money.

6. Invest It

Opening a taxable brokerage account opens the doors to a world of investments: individual stocks, mutual funds and exchange-traded funds (ETFs), bonds and bond funds, and more. Although investment returns aren't guaranteed, adding investments can help you diversify your portfolio and grow your money. Here's an example: If you invested $2,000 of your 2022 tax refund in the S&P 500 in March of 2023, it would have been worth more than $2,500 at the end of February 2024.

Smart investing requires some basic know-how, but many brokerages may offer information on how to invest, access to advisors and robo-advisors that automate your investment choices.

7. Invest in Yourself

Spending on yourself is not off limits. On the contrary, consider using at least part of your refund to pay for something that represents an investment in yourself and your life.

  • Well-being: Buy yourself some good running shoes so you can train without pain. Get dental work done. Make appointments for any necessary medical tests and procedures you didn't do this past year. Health is the best kind of wealth.
  • Education: Whether you're interested in professional development, mastering new life skills or simply having fun learning to cook or play the ukulele, classes are a great investment in you.
  • Fun: If the past year has been one long exercise in stretching to make ends meet, treat yourself—even if it's a small treat. Host a dinner out for you and your mates, stay overnight at a nice hotel or buy yourself the nice sunscreen. Anything fun that won't break the bank is at least worth considering. You earned it.

The Bottom Line

Before you earmark your tax refund, you'll need a place to hold it. The fastest and safest way to receive your tax refund is through IRS direct deposit to a bank account. If you don't have a checking account, consider the Experian Smart Money™ Digital Checking Account & Debit Card, which can help you build credit without debt by linking to Experian Boost®ø. Start building credit with eligible bill payments after three months of payments. See terms at experian.com/legal.

​​In the end, a tax refund really isn't a windfall: It's money you overpaid to the government throughout the year. While a sizable refund may be a sign that you should consider adjusting your withholding (or estimated tax payments if you're self-employed), it can also provide you with an annual opportunity to do something significant: Pay down your debt, amass savings, contribute toward your retirement, splurge or even use your funds to help someone in need. While the money itself is not a gift, the opportunity to do something good with it certainly is. Enjoy!