In a NutshellAn income tax refund can give your financial situation a boost. Here are some ways to use a refund to your advantage, from saving for a rainy day to investing.
Getting an income tax refund can be exciting, but also stressful. You’ll have to decide what to do with your funds. You might have a lot of options, like saving, investing or paying down debt.
Here’s a list of things to do with tax return money that could help improve your financial situation.
- Bulk up your savings
- Pay down high-cost debt
- Contribute to your retirement account
- Invest in career-building education
- Save to buy a home
- Increase your home equity
- Spruce up your home
- Make a tax-deductible donation
1. Bulk up your savings
Your tax return can pay off more if you put it in a high-yield savings account, especially when interest rates are going up.
Savings accounts are good for setting aside cash for shorter-term financial goals since they’re insured by the FDIC for up to $250,000 per depositor, per covered account. You may want to use one to save for a rainy day, set aside money for a car down payment or plan for a vacation.
An emergency fund is a savings account that can be a cushion against things you don’t expect, like a major illness, job loss, car accident or natural disaster.
You can use your tax refund to start, build or replenish your savings.
2. Pay down high-cost debt
You can give your financial situation a big boost if you use your tax refund to pay down high-interest debt from credit cards, a payday loan, a car title loan, medical bills or private student loans.
Slashing this kind of expensive debt means you’ll pay less in interest every month, potentially leaving you with smaller payments or lowering the total interest you’ll pay throughout the life of the loan. Getting rid of high-interest debt can help strengthen your finances for the long term.
3. Contribute to your retirement account
Retirement might seem too far off to worry about, but time can be your friend. The earlier you save and the more you save now, the more you’ll build up your retirement funds and benefit from compound interest.
Putting your tax refund into a retirement account — such as a 401(k) through your employer, a traditional IRA, a Roth IRA or another account with potential tax advantages — can help jumpstart your future financial security.
Plus, you might be able to deduct some of the contributions on next year’s tax return.
4. Invest in career-building education
Your tax refund might pay for a four-year college degree, but you could use it to earn a professional certificate, add a new skill to your résumé, or relocate to a city with better prospects for your career and income.
Over time, a salary increase might be worth much more than the value of your refund today.
5. Save to buy a home
If one of your goals is to stop renting and buy a home, you’ll need to save up for closing costs and a down payment on the mortgage. A tax refund can give you a start on the road to homeownership. If you’ve already started to save, your tax refund could move you down road faster.
Check out these six tips to save for a house.
6. Increase your home equity
If you already own a home, you could use your tax refund to boost your home equity by making extra mortgage payments or applying a chunk of cash directly to the principal. Reducing your housing debt could also lower your interest costs over the term of your home loan.
7. Spruce up your home
You can also potentially increase your property value — and thereby your equity — by using your tax refund to make home improvements. A good approach is to start with maintenance you’ve been putting off and then tackle other updates and improvements.
Replacing old appliances that are near (or beyond) the end of their useful life can help lift your home’s value and lower your monthly utility bills on top of it, since newer appliances are generally more energy-efficient than older models.Read more: 6 ideas to increase your home’s value
8. Make a tax-deductible donation
If your finances are in good shape and you’re feeling generous, you could donate your tax refund to a charity and potentially deduct the charitable donation from your taxes if you itemize your deductions when you file your tax return. Giving back also feels good!
Your tax refund isn’t extra money — it’s actually income you earned during the tax year. And it’s money that you gave as an interest-free loan, albeit temporarily, to the government.
If you received a large refund, one reason could be that you’re claiming fewer allowances on your W-4 than you should, which causes your employer to withhold more federal taxes from your paycheck. You might want to readjust your income tax withholding and have more money in your pocket every month that you could put to better use.
You worked hard for your refund. Now, your refund should work hard for you — so consider all your options.