Build a better future with your tax refund

No one loves taxes. But for almost 40 million taxpayers, there is a silver lining at the end of tax season: a refund. With the average refund check coming in around $3,120 in 2015 there are a lot of possibilities for saving and spending.1

Sure, you could take your refund check straight to the mall. Instead, think more deliberately about how to use the windfall to strengthen your financial future at every stage of your life.

Here are some ways to use your tax refund to improve your financial footing.

Just starting out

Pay off credit card debt

Nearly seven out of 10 Americans earmark their refunds for paying off debt.2  There’s a good reason why people see it as such a smart financial move. Paying down high-interest debt gives you immediate savings. If you pay off a credit card bill that was charging you an 18 percent interest rate, it’s like earning 18 percent on your money. You’d be hard pressed to find an investment that pays that much without a significant amount of risk. Although you may be able to cover your debt at times with a tax refund, it doesn’t always work out that way. It’s never a bad idea to minimize credit card debt whenever possible.

Bolster your savings

The most important thing you can do for financial security is to build a cushion to handle the unexpected. A major auto repair, a broken boiler or a medical emergency can send your finances into a tailspin if you’re not prepared. Otherwise, you might be forced to use high-interest credit cards or fall behind on your bills. Saving three to six months of expenses can help you make major inroads toward your goal.

Turbo charge your retirement

Saving for retirement while you’re young is one of the best things you can do for your future self. Early on, every little bit counts thanks to the magic of compounding. Use your refund to make additional retirement savings painless by reimbursing yourself for the money that will come out of your paycheck.

Mid-career

Invest in yourself

A class or coursework toward a degree is an investment in your career, which in turn could help you achieve greater financial security. Focus on the skills you need to score a promotion or land your dream job. Or you can hire a career coach who can help you plot further steps to advance your career.

Make home improvements

Leaky roof? Faulty wiring? Home improvements are an excellent use of a refund check. Not only will taking care of these maintenance projects enable you to enjoy your home now, but regular upkeep could help preserve and grow your home’s value when you sell. It’s worth considering as a wise investment in the future.

Soon-to-be-retired

Get healthy

Taking care of your health may not sound like it has much to do with money, but it is. If your weight is normal, your blood pressure is under control and you’re managing stress well, you may avoid many major health care expenses. So use some of your refund to get a gym membership (and actually use it), or buy a new bike and start traveling on two wheels.

Boost your retirement savings

After age 50, you can invest an additional $6,000 in a 401(k) plan and $1,000 in an individual retirement account above the maximums ($18,000 and $5,500, respectively).3 Even if you aren’t hitting the maximum amounts, consider using some of the refund to boost your savings. Even small amounts can add up over the years.

For everybody

Take an “all-expense paid” vacation

After you’ve taken care of your savings and debt repayment goals (and if you haven’t exhausted your refund), consider treating yourself to a relaxing vacation. Of course, there’s nothing relaxing about coming home to a pile of credit card bills for plane tickets, hotels and meals. Instead, use your refund to pay for your vacation ahead of time. All you have to do is show up with your guidebook. To help stick to your vacation budget, consider opening a separate bank account with your tax refund. You can pay for your travels from the account with a debit card.

Give it away

If you’re not drowning in debt, and your savings are on track, why not use your refund to become a philanthropist? Not only will you feel good about supporting a cause that’s close to your heart, but you’ll also earn yourself a nice tax deduction for next year, perhaps even pulling off another refund.

A tax refund is a good way to tackle some important financial goals. However, if you’re consistently pulling in big refunds, consider adjusting your withholdings so your employer is only taking out the right amount to cover your tax liability. Take the money you’ve been overpaying and invest it in something with the potential for higher returns. Speak with a financial advisor about your financial goals and how you can invest to meet them.


1“Tax Refunds Reach Almost $125 Billion Mark.” IRS. February 26, 2015. https://www.irs.gov/uac/Newsroom/Tax-Refunds-Reach-Almost-$125-Billion-Mark-IRS.gov-Available-for-Tax-Help

2“How Tax Payers Use their Refunds.” NFCC. February 1, 2015. https://www.nfcc.org/press/multimedia/news-releases/nfcc-online-poll-reveals-how-taxpayers-plan-to-use-their-tax-refunds

3“Roth Comparison Chart.” IRS. October 23, 2015. https://www.irs.gov/Retirement-Plans/Roth-Comparison-Chart