Eight Smart Things to Do with Your Tax Refund

May 26, 2021

Tax season is right around the corner, and it may be helpful to have a plan for the funds you expect to receive from the IRS. You may be tempted to spend the cash right away and treat yourself, but there are so many great things you could do with the sum that you won’t be regretting later. Here are some responsible ways to use your tax refund:

1. Create an emergency fund Many Americans don’t have an adequate savings account accessible in case of a sudden financial need. A lack of savings leaves you vulnerable to a job loss, medical emergency or major repair and can force you to seek out short-term loans at high interest rates or carry credit card balances for an extended period. Using your refund to start or augment an emergency fund could leave you breathing easier should one of those events arise. 2. Send it to savings The IRS allows you to split up your refund in up to three accounts via direct deposit. That’s a perfect opportunity to stash some funds in a savings account that’s inconvenient for you to access, assuring that the money stays out of sight and out of mind until you really need it. If you maintain an account at a bank near a former residence without a branch nearby, augmenting your balance there can keep it safe from impulse buys. 3. Pay off debt If you are carrying a credit card balance, consider using your tax refund to pay that off. It doesn’t make much financial sense to put the IRS check for $3,000 in a fund yielding 1% interest and maintain a $3,000 balance on a credit card account charging 18% interest. Going this route allows you to put more money in the bank every month once those minimum payments vanish from your list of bills. 4. Fund your retirement What better way to sock money away for retirement than by using funds that aren’t a part of your paycheck anyway? You can use the funds to purchase or augment a Roth or traditional IRA, which sequesters your money away for when you’re no longer on the job. At that point, you’ll probably be grateful that you had the foresight to save for retirement rather than spend it on something you’d have long since forgotten about. 5. Invest in the stock market Historically, the stock market has offered greater return on investment than savings accounts, CDs or bonds. While its fluctuations make it a risky choice for money you’ll likely need in the coming months, the long-term outlook makes it a better option if you don’t have an immediate financial need. Pick individual stocks or select an index fund that moves up and down along with the market. 6. Prepay your mortgage Making extra payments on your mortgage can be a great way to save money over the long term. Because so much of your payment on a long-term note goes to pay off the interest, reducing the principal can have an exponential effect over the life of the loan. Even an extra payment or two now can make a big difference in your future obligation to the bank. 7. Make home improvements If you live in an older home, spending some of that refund around the house can lower energy bills. Replacing old windows can improve the efficiency of your air conditioning in the summer and reduce your electric bill. Old appliances can be replaced by models that use less energy. If your kitchen or bathroom is out of date a remodeling project can improve the functionality of your house now and also make it more attractive when you decide to sell. 8. Buy life insurance Life insurance can be easy to overlook, particularly for younger workers confident that they have plenty of time to worry about that. But particularly for those who are married with families, a term life policy can provide protection for loved ones at a relatively low cost. For the cost of a few hundred dollars, your tax refund can allow your family to maintain its standard of living if the unthinkable happens.