Got a Tax Refund? Here’s How You Could Put It Toward Your Retirement

November 26, 2024

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If you’re expecting a tax refund this year, there are many ways you could put that money to work. You could spend it on something you’ve had your eyes on for a while, pay down debt, or put it towards your kids’ education. You might even want to divvy up your refund across those options.

You could also put your refund toward your retirement. When it comes to building up your nest egg, every little boost can help in the long run.

But first, do you need to use your tax refund for something else?

Before we get into how you could put your tax refund toward your retirement, check to make sure you don’t need the money to cover any immediate purchases or expenses.

Ask yourself if you need to save the refund for something else. For example, perhaps, you’re planning on buying a home or investment property soon, and you would rather use the refund to help build up your cash reserves.

By taking a moment to look at your overall financial picture, it could help you decide how much of the refund to set aside for retirement. And if you’re able to put some or all of your refund toward your nest egg, here are two options to consider.

Contribute to an IRA

Putting money regularly into your IRA is a smart way to build up your nest egg. If you decide to save a portion or your entire refund in your IRA, your contribution could help bring you one step closer to your retirement goals.

Just remember that IRAs, both traditional and Roth, have annual maximum contribution limits.

For 2024 and 2025, the standard annual contribution limit for an IRA is $7,000. If you’re 50 or older, you can make an additional catch-up contribution of up to $1,000. This means you could make a total contribution of up to $8,000 ($7,000 + $1,000).

Keep in mind: IRA contribution rules and limits are always subject to change. It’s a good idea to check in with the IRS each year for the most up-to-date information.

Learn more: Traditional vs. Roth IRA: Which Is Right for You?

Maximize your 401(k) contribution

If you’re not already maximizing your 401(k) contributions, your tax refund could be put to use there, too. You might be wondering: How could I put my tax refund toward my 401(k) when contributions are automatically deducted from my paychecks?

Good question. One potential way is to increase the amount of your automatic contributions (usually done by contacting your employer’s human resources department). When you do this, you’re telling your employer to take more money out of your paycheck for your 401(k). You’re essentially using your tax refund to cover the contribution increase.

On top of this, let’s say your employer offers to match your contributions (usually up to a certain amount). Using your tax refund to hike up your regular contributions might help you snag those matching dollars to supercharge your retirement account.

Be aware that 401(k) plans are also subject to annual contribution limits. The standard annual contribution limit to a 401(k) plan is $23,500 for 2025 ($23,000 for 2024 ). But individuals who are 50 or older could make an additional catch-up contribution of up to $7,500 (if your 401(k) plan allows it).

In other words, if you’re 50 or older, you could contribute up to a total of $31,000 ($23,500 + $7,500) to your 401(k) plan in 2025. For more information on catch-up contributions, visit IRS.gov.

Important: Under SECURE Act 2.0, starting in 2025, 401(k) plan participants age 60 to 63 will have a higher catch-up contribution limit. The higher catch-up contribution limit for 2025 is $11,250 (instead of $7,500). This means that those age 60 to 63 could contribute up to a total of $34,750 to their 401(k) in 2025. See the IRS press release here for more information.

If you have questions about whether you’re eligible to make catch-up contributions, check with your 401(k) plan provider or a tax professional.

Retirement account contributions could provide potential tax benefits

One of the upsides of saving for retirement with an IRA and/or a 401(k) is the potential tax benefits. If you contribute to a traditional IRA or 401(k) with pre-tax dollars – you could reduce your tax bill for the year. Plus, your money can typically grow tax-deferred until you withdraw it in retirement.

On the other hand, with a Roth IRA, if you contribute after-tax dollars today, your withdrawals in retirement are generally tax-free as long as certain conditions are met (see the IRS’s Roth IRAs webpage for more information).

Good to know: Your eligibility to deduct a traditional IRA contribution depends on a number of factors, such as tax-filing status, whether you have a retirement plan through an employer, and your income. Visit the IRS website on IRA deduction limits for more information.

The importance of making your tomorrow a priority today

A tax refund may feel like “free money,” but remember, it’s simply what you overpaid in taxes to the federal government. If you’re getting a refund, think about how you might want to use it. Putting that money toward your retirement, for example, is one smart way to put those dollars to work. Whether you decide to park that money in your IRA or 401(k), your future self will thank you.

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