5 Things You Can Do With Your Tax Refund

If you’re expecting a tax refund this year, consider yourself lucky. Refunds from the IRS are never a sure thing.

You might be dreaming up all sorts of things to do with the little extra cash that’s coming your way. Perhaps, a feel-good purchase or a fun vacation. Or you could put that money to work towards your financial goals.

The truth is we could always be saving more. And a tax refund provides an opportunity to stash more money away. Sure, we could give you the old refrain about making sure your emergency fund is in good shape. But we’re going to assume you’re a pro when it comes to saving for unexpected expenses.

So here are five other options you may want to think about when it comes to putting your tax refund to good use.

Show your retirement savings account some love

Just like you can never have too much money, you can never save too much for retirement. Retiring in comfort can be expensive!

If you’ve been an avid reader of our retirement savings articles (if not, why aren’t you?), then you know that you’re going to need anywhere between 80% to 100% of your pre-retirement income to maintain your standard of living when you’re not working anymore.

We understand that saving for retirement might fall off the radar when you have other more immediate expenses to tend to. But that’s why a tax refund can provide a great opportunity to show your retirement savings account some love.

If you can, try to maximize your contribution to your 401(k) plan or IRA. For 2023, the annual 401(k) contribution limit is $22,500 (those who are age 50 or over can make additional catch-up contributions of up to $7,500, bringing the total to $30,000). For 2022, the annual 401(k) limit is $20,500 and the catch-up contribution limit is $6,500.

For IRAs, the contribution limit is $6,500 for 2023 (or $7,500 if you're age 50 or older). For 2022, the limit is $6,000 (or $7,000 if you're age 50 or older).

Open a CD account and up your savings game 

Maybe you’ve already contributed all you can to your retirement account for the year. If that’s the case, wow! Go ahead and pat yourself on the back.

With that accomplishment in hand, we wouldn’t blame you if you’d rather treat yourself with the tax refund. But if you’re interested in looking for ways to put that extra cash to work, consider opening a certificate of deposit (CD).

CDs are a good way to boost your savings because they typically offer higher interest rates than a traditional savings account. There are also different CD strategies (e.g., CD ladder and CD barbell) that you can use to give yourself a little more flexibility when it comes to accessing your money.

Open a high-yield savings account

If you’re planning to make some major purchases in the near term and don’t want to tie up your money in CDs, you might also consider putting your refund into a high-yield savings account.

These accounts typically enjoy a higher interest rate than a traditional savings account. This means you can really take advantage of the power of compound interest to help boost your savings while still being able to access your money quickly when you need it.

As you consider your options, pay attention to any minimum balance or minimum opening deposit requirements and account fees.

Invest your tax refund

If you are looking for potentially higher returns and have a tolerance for risk, investing your tax refund could be worth a look. Common types of investments include stocks, bonds, money market mutual funds, and exchange-traded funds (ETFs).

Historically, investing in the stock market on average generates higher returns. But remember, there are no guarantees when it comes to investing. What happened historically may be different from what happens in the future.

Want to learn more about the difference between investing and saving? Check out our "saving vs. investing" article.

Pay down your debt

You may also consider using your tax refund to pay down your debt if you still have student loans or outstanding credit card balances hanging over you. Some experts recommend you tackle the loans with the highest interest rates first since higher-interest debt can be costly.

Remember, the quicker you pay off your debt, the sooner you can free up more money in your budget for something else.

Not sure whether to save your refund or use it to pay down debt? We have some insights that could help – including on how to prioritize savings versus debt and how to make a debt payment plan.