5 Things You Can Do With Your Tax Refund

If you’re expecting a tax refund this year, think about putting that money to work towards your financial goals, whatever they may be.

But before you do anything with your refund, make sure you don't need that money to cover any essential or unexpected expenses right now (e.g., car repairs, unexpected bills, etc.). In fact, it's a good idea to check in on your emergency fund to make sure that it's in good shape.

If your emergency fund is in order, here are five other ways you could put your tax refund to good use.

1. Show your retirement savings account some love

Generally speaking, 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 maximum annual 401(k) contribution limit is $22,500. (Individuals who are age 50 or older can make additional catch-up contributions of up to $7,500, which means they could contribute up to $30,000 in total).

For 2024, the annual 401(k) limit is $23,000 and the catch-up contribution limit is $7,500. which means for individuals who are age 50 or older, they could contribute up to $30,500. See IRS's "Catch-Up Contributions" for more information.

For IRAs, the maximum annual contribution limit is $6,500 for 2023 (or $7,500 if you're age 50 or older). For 2024, the limit is $7,000 (or $8,000 if you're age 50 or older).

Good to know: Keep in mind that IRS contribution limits and rules are subject to change. Always visit IRS.gov or check with a tax professional for the most up-to-date information.

2. 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, congrats!

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.

3. 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 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.

4. 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).

But remember, investing involves risk. There are no guaranteed or predictable returns. Potential market volatility means your investments could make money or lose money. You could even lose your principal, which is the amount of money you originally invested.

That being said, there's also the possibility for gains when you invest. Historically, over long periods, financial markets have generated higher returns than interest earned in bank deposit accounts.

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

5. 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.