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Millions of Americans will receive a tax refund this year when they file their taxes, giving them a nice cash boost that can help improve their financial lives. According to the IRS, the average tax refund is typically in the low thousands, so the money taxpayers receive can be significant.
If you haven’t filed your taxes yet, you have until April 15, 2024 to do so. Here you will find a calculator to help you determine your tax refund.
And while the idea of spending it may be tempting, the best way to use your refund is to grow your savings, invest, or reduce your debt.
Key tax refund statistics
- According to a Bankrate survey, 75 percent of American adults expecting a tax refund say it is important to their overall financial situation.
- A third of Americans worry their refund will be smaller than usual, the Bankrate survey found.
- According to the Bankrate survey, only 5 percent of Americans said they plan to invest their tax refund.
- According to the IRS, the average tax refund as of March 29, 2024 was $3,050, compared to $2,910 at the same time in 2023.
- The IRS had processed 60.8 million refunds and refunded approximately $185.641 billion to taxpayers as of March 29.
- According to the IRS, as of March 29, about 95 percent of tax refunds were made via direct deposit.
5 smart ways to invest your tax refund
A financial windfall is an opportunity to improve your finances. Here are five smart options for using your tax refund.
1. Boost your emergency fund
There is some debate about what to do first: pay off high-interest debt or build an emergency fund. Either way, starting an emergency fund should be a top priority – and the rest can be used for debt or other priorities.
Achieving financial security requires planning for unexpected events. A recent Bankrate survey found that fewer than 40 percent of Americans could afford an unexpected $1,000 expense from a savings account. Setting up (or encouraging) an emergency savings account is therefore an important part of a smart financial plan.
“That way you’re covering any ‘what ifs’, or anything else that could derail your budget and put you even more in debt,” says Flannigan.
A $3,000 refund into a high-yield savings account or a money market account that yields a 4 percent annual yield (APY) would yield growth of about $120 after a year.
Therefore, if you put your money in a savings account, make sure you put it in an account that earns the most interest. For comparison, if you achieved the national average savings return of 0.57 percent, you would earn about $17 after a year.
In five years that will start to add up – or not. Assuming variable APYs remain the same, you would earn about $515 more in the higher-yielding account over that period.
“We recommend a high-yield online savings account so that it’s far enough away from your normal expenses that you won’t use it, but it’s there when you need it,” says Flannigan.
Savings accounts are not intended as transaction accounts. If you need the ability to write a limited number of checks from savings, look for a money market account that offers check-writing privileges, in addition to a competitive interest rate.
2. Contribute to an IRA
If you’ve already filed your return, it’s too late to contribute to an individual retirement account for the 2023 tax year unless you want to file an amended return. But you can withdraw your refund into a traditional IRA for the current tax year, plus what’s left in the account can compound tax-free until you withdraw it, and the contribution can reduce your taxable income for 2023.
(If you haven’t filed yet, the deadline to contribute to an IRA for the 2023 tax year is April 15, 2024.)
If you are eligible to contribute to an IRA, note the contribution limits: $6,500 for 2023 for most filers; $7,500 for people 50 and older. In 2024, the limits will increase to $7,000, or $8,000 if you are 50 or older. An IRA contribution can help you boost your retirement balance — and can be a good option, especially if you have sufficient emergency savings, no credit card debt or something with a high APR, and you’ve maximized your 401(k) contributions.
Bankrate’s broker reviews can help you find a brokerage for an IRA or other retirement account.
3. Pay off debts
According to data from Bankrate, the average annual interest rate on variable rate credit cards as of April 10, 2024 is 20.75 percent. Using your tax refund to pay off high-interest debt may be the best use of the money. The average credit card balance was $6,360, according to TransUnion data from Q4 2023. If you paid just $150 a month for that balance, it would take 78 months to pay off and cost another $5,199 in interest, according to Bankrate’s Credit. Card payout calculator.
According to a Bankrate survey, paying off debt was the top priority for Americans expecting a tax refund in 2023. About 28 percent planned to use their tax refund to pay off debt, up from 23 percent in 2023. Advisors suggest focusing on paying off high-interest debt first because of the weight it can have on your finances.
“That’s typically the most expensive and worst type of debt,” says Liz Landau, a certified financial planner at Landau Advisory in White Plains, New York. “So that’s usually the first thing I suggest for a refund.”
Flannigan of MainStreet Financial says there are two ways to approach paying off debt:
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Avalanche method: Focus on paying off the debt with the highest interest. Once that’s paid off, move on to the balance with the next highest rate. This method saves the most money.
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Snowball method: Pay the smallest balance first for the feeling of satisfaction, and then work your way up until you’re done.
Money tip: The snowball and avalanche methods can both be effective ways to pay off debt. The avalanche method probably saves the most money because you pay off high-interest debts first, while the snowball method is more about psychological gains that come from paying off small balances first.
Other tips for paying off debt include paying more than the monthly minimum, making payments more than once a month, and sticking to a fixed budget to help control expenses.
Money tip: The snowball and avalanche methods can both be effective ways to pay off debt. The avalanche method probably saves the most money because you pay off high-interest debts first, while the snowball method is more about psychological gains that come from paying off small balances first.
4. Contribute to a savings account – to save for important goals
If you already have an emergency fund and you’ve spent money on debt or have no debt, consider putting at least part of your tax refund into a high-yield savings account. It could be money intended for a down payment on a house, a wedding or saving for a vacation.
About 26 percent of Americans said they plan to use their tax refund to grow their savings, according to Bankrate’s survey, the second-highest use after paying off debt. If you contribute $3,000 to a high-yield savings account that yields 4 percent, you would have $3,650 left after five years.
You do not have to earmark a savings account now. Your life goals will likely change as you get older. So having that money in your savings account makes it easy to adapt when priorities change. You can put all your savings in a single account or place money in separate high-yield savings accounts to ensure that money intended for one purpose isn’t casually used for something else. Make sure you keep your emergency fund in a high-yield savings account so that you get the best interest rate available while still having regular access to the money.
To get the highest APY, banks offered tiered balances to encourage customers to put all their money in one institution. But now, online banks generally offer the best APYs and require low or no minimum balances in return. Several online banks offer competitive returns with no or low minimum balance requirements.
5. Invest and build wealth
Investing is an important part of building wealth and saving for long-term goals like retirement, so using your tax refund to invest can be a good choice. Securities such as stocks and bonds can be used to build a diversified portfolio that can grow significantly over time.
Mutual funds and ETFs can be used to build diversified portfolios at a low cost, so you don’t have to worry about choosing which individual stocks or bonds to buy. Most online brokers can get you started with just a few dollars, so don’t worry if you don’t have much to invest initially.
You can also consider using a robo-advisor, which can build an investment portfolio based on your goals and risk tolerance, but charges a much lower fee than traditional financial advisors. The best robo-advisors have investing apps that allow you to easily monitor your portfolio from your phone.
The main distinction between using your tax refund to invest in assets like stocks and using them to save is the amount of risk involved. Stocks are volatile in the short term, so only invest the money if you are sure you won’t need it for the next five years. If you may need the money, a high-yield savings account is probably a better choice.
Additional Tax Refund Resources
“Ultimately, you have to ask yourself what will make you feel better in the long run,” says Flannigan. If you want a smaller refund in the future, she says you can increase your withholding allowances.
“So less income tax will be withheld, your refund will be smaller, but your monthly paycheck will be larger, and you can spend that money on your goals instead,” says Flannigan. Or you can consider your tax refund as a forced saving.
