Getting a tax refund from Uncle Sam can be exciting. After all, some surprise cash can allow you to splurge on things that previously seemed out of reach, like major home improvements or bucket list travel.
However, before you spend your entire refund, it pays to consider how to use that extra cash to improve your financial future or shore up your safety net during economic uncertainty. Let’s look at some smart ways to put your refund to work before the direct deposit hits your bank account.
Refund amounts vary based on many factors, but according to IRS filing season statistics, the average refund amount was $3,138 last year, down slightly from the 2023 average of $3,167.
Before exploring the best ways to use your tax windfall, it’s worth pointing out that getting a big refund isn’t necessarily a good thing. After all, the IRS is simply giving you your own money back, which serves as an interest-free loan for the government.
If you consistently get issued large refunds when you file your income tax return, work with a tax adviser to correct your federal tax withholdings so you won’t have to wait for next year to get a big boost to your bottom line.
Read more: Free tax filing: How to file your 2024 tax return for free
Been meaning to put away some savings but keep getting sabotaged by unexpected bills? A tax refund is the perfect seed money for an emergency savings fund.
Emergency savings, sometimes called rainy day funds, can help support your family during a job loss which often involves not just the loss of income but also healthcare. Or it could front money for unexpected costs like car or home repairs.
How much should you have squirreled away in an emergency fund? Any cash is better than nothing, but experts encourage putting away savings equivalent to three to six months’ worth of expenses.
Read more: What is an emergency savings fund?
Dumping a sizable portion of your refund check into a savings account to keep it safe from impulse buys isn’t a bad idea. But it’s important to remember that not all savings accounts are created equal when it comes to interest rates.
You’ll get more bang for your buck by leaning into high-yield savings accounts, money market accounts, or a high-yield CD (certificate of deposit). While those high APYs are a big benefit, there are some drawbacks, such as restricted access to your funds and scheduled minimum deposits. Understanding how these accounts work is crucial.
And be sure you choose a bank that’s FDIC insured. The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures your bank deposits up to $250,000 per depositor in case of bank failure.
Read more: High-yield savings account vs. CD: Which is right for you?
One of the most effective things you can do with your refund check is pay down debt. Eliminating your credit card debt, paying down medical bills, and tackling any other debts with interest in double-digit territory is a solid investment in your financial future.
If you don’t have high-interest debt, you can make extra payments on student loans, a car loan, or even a home loan that you might not otherwise be able to afford.
Read more: The best ways to pay off credit card debt
Thanks to the magic of compound interest, putting your refund check into a retirement account is an investment strategy that pays serious dividends. Adding $3,138 (the average refund in 2024) to a typical IRA could turn your refund check into as much as $25,000 after 25 years.
However, before you decide to use all your extra money to pad your retirement savings, double-check the contribution limits for a traditional IRA, Roth IRA, and 401(k). If you’ve already contributed the maximum, you may want to add funds to your health savings account (HSA) instead.
Worried about protecting the gains of your retirement plan as you approach 65? Experts recommend pulling 5-10 years of living expenses into more accessible high-yield savings accounts when you reach retirement age and shifting some of your asset allocation into the relative safety of high-quality bonds. Reducing risk in your retirement portfolio can shield your immediate retirement income from potential volatility in the stock market.
Read more: These are the new traditional IRA and Roth IRA limits in 2025
Take time to carefully consider your personal finance goals and put your individual income tax refund to work toward them. Some possibilities include:
Read more: Where’s my refund? How to check your federal tax refund status
According to the IRS, during a typical tax year, they can issue most refunds to taxpayers within 21 calendar days of receiving your federal tax return. However, if you mail a paper tax return, that process can take a week or longer than using the IRS e-file or direct file options. Once you’ve filed, you can check your refund status and see if it’s been deposited to your bank account using the IRS Where’s My Refund tool.
The majority of Americans surveyed earlier this tax season said that rather than save money, they planned to use their tax refunds to afford the increasing costs of basic necessities. Only about a third of Americans said they were putting their refund checks toward paying off existing debt.
