If you have a refund check coming your way, think about using it to strengthen your financial situation. This year, the average refund is $2,252—a substantial amount.
Here are 10 smart ways to put that money to good use.
1. Pay Off Debt
Credit card debt in the U.S. has reached $1.21 trillion, with a 4% increase in balances last quarter, according to the Federal Reserve Bank of New York. With interest rates high, carrying a balance can be costly. The average credit card interest rate is 20.09%, meaning a $5,000 balance could accrue over $1,000 in interest annually if only minimum payments are made.
Using your tax refund to pay down credit card debt can save you money on interest and lower your credit utilization ratio, improving your financial health. If you can’t pay it all off, try to use as much as possible and consider debt repayment strategies like the debt snowball or avalanche to pay off your debt faster.
2. Build Your Emergency Fund
It’s recommended to keep three to six months’ worth of expenses in an emergency fund to avoid debt or draining retirement savings when unexpected costs arise. If you’ve used your emergency fund recently, your tax refund can help replenish it.
Even contributing a small amount can enhance your financial safety net, making it easier to handle life’s surprises.
Aside from the financial benefits, having a well-funded emergency fund offers peace of mind, allowing you to make decisions with confidence instead of stress.
3. Boost your Retirement
You can contribute up to $7,000 to a Roth IRA ($8,000 if you’re 50 or older) and withdraw the funds tax-free in retirement, as long as you meet age and holding period requirements. To qualify, your Modified Adjusted Gross Income (MAGI) must be below $146,000 (single) or $230,000 (married filing jointly). Partial contributions are allowed for incomes between $146,000–$161,000 (single) or $230,000–$240,000 (joint).
If you work and your spouse does not, you can contribute to a spousal Roth IRA if your joint income falls within the Roth IRA income limits. Roth IRAs offer tax-free growth, making them a great tool for long-term retirement savings.
4. Boost Your Education
Balancing saving for college can be tough, but a 529 plan offers a solution by allowing you to save for education expenses with tax benefits. Contributions to a 529 plan grow tax-free when used for qualified education costs.
Besides covering college expenses, you can use up to $10,000 annually for K-12 tuition at private or religious schools. Many states also provide tax deductions or credits for contributions, making it a smart way to invest your refund in your child’s education while lowering your tax liability.
You could also use your tax refund for courses, certifications, or even paying student loans.
5. Improve Your Home
While your tax refund may not be enough for major renovations like a full kitchen or bathroom remodel, it can still support valuable home improvements. Consider smaller projects such as adding a backsplash, painting rooms or cabinets, updating bathroom fixtures, upgrading faucets, organizing closets, installing a programmable thermostat, or improving your yard. These upgrades refresh your home, increase its value by meeting today’s buyers’ preferences, and can also enhance energy efficiency by reducing utility costs.
Another smart use of your refund is investing in home hardening to protect against natural disasters. Simple steps like adding storm shutters, reinforcing garage doors, or securing heavy furniture can strengthen your home’s resilience against hurricanes, earthquakes, or wildfires. These improvements not only safeguard your property but could also lower your insurance premiums.
6. Invest in Your Health
You may want to consider investing on a wellness program, or to contribute to a Health Savings Account (HSA) for 2024 the contribution limits are $4,150 for individuals and $8,300 for families. If you’re 55 or older, you can add a $1,000 catch-up contribution.
HSAs offer a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. Funds can cover deductibles, co-payments, prescriptions, and other medical costs. After age 65, HSA funds can also pay Medicare Part B, D and Advantage premiums, though contributions stop once you enroll in Medicare.
To qualify, your High Deductible Health Plan (HDHP) must have a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage in 2024. By contributing to an HSA, you can manage medical costs and save for future healthcare, all while gaining tax advantages.
7. Prepay your vacation and travel smartly.
Plan a meaningful trip without going into debt. Rather than putting your vacation on a credit card and carrying interest after your trip, consider using your tax refund to prepay for your getaway. This helps you avoid debt and lets you take advantage of travel deals, booking your trip with peace of mind knowing it’s already paid for.
If you have a travel rewards credit card, check your points or miles balance—they could cover flights, hotels, or even an entire vacation package. Combining your refund with rewards can lower costs, allowing you to focus on experiences instead of expenses and get the most out of your travel rewards.
Even if you’re not planning a trip right away, putting your tax refund in a savings account for future travel ensures you’re financially ready for whenever the time comes—whether it’s for holiday travel, a dream vacation, or an impromptu weekend getaway.
8. Help Your Kid Save.
Helping your child save for the future by establishing a Roth IRA with your tax refund can give them a strong start on retirement savings. Children of any age can contribute as long as they have earned income, such as money from mowing lawns or babysitting. The contribution limit is up to $6,000 or the total amount of their earned income, whichever is smaller.
You can gift them the funds to make this contribution, effectively matching their earnings. This approach encourages early saving habits and takes advantage of compound growth over time.
9. Start a Side Business.
Starting a side business can be a great way to use your tax refund, especially if you’re looking to create an additional income stream or pursue a passion project. Whether you’re interested in turning a hobby into a business, offering services, or developing a product, your tax refund can provide the initial capital you need to get started.
If you’re considering using your tax refund for a side business, some steps you can take include researching your market, creating a business plan, legal and administrative steps such as registering your business, get any necessary licenses, and set up a proper accounting system and lastly invest in marketing.
If you have a business idea in mind, this could be a perfect way to use your refund to get it off the ground.
10. Help Family Members and others.
If you’ve taken care of your financial priorities, consider contributing to a loved one’s education or financial needs. Using your tax refund for charitable donations can be both rewarding and tax-efficient. Although the increased standard deduction has reduced the number of itemizers, strategies like bunching—grouping several years’ worth of donations into one—can make itemizing more beneficial. This approach helps you exceed the standard deduction, maximizing your tax savings.
Incorporating charitable contributions into your financial plan not only supports causes you care about but also provides potential tax benefits, making it a meaningful way to use your refund.