If there's a upside to tax season, it's getting a tax refund from the IRS. The key is turning what amounts to an annual windfall for many Americans into a personal finance win.
The average tax refund for the 2024 tax year is $3,271, up 5.2% from a year ago, according to IRS data through the week ended March 14. So far, 49.8 million Americans have gotten refunds totaling $163 billion.
But maybe treating your refund as mad money or newfound cash to fund a spending spree isn't the best course of action. You can use the cash to fill holes in your personal finances or invest in your future. You might also bolster your portfolio.
"When we look at a tax refund as a windfall, our natural inclination is to spend it," said Lisa Featherngill, national director of wealth planning at Comerica Wealth Management. But there are more effective ways to put the money to work.
Understand Your Tax Refund
Keep in mind that you're only getting a tax refund because you overpaid the IRS. Doing so amounts to "an interest-free loan to the government," said Jason Grover, founder and financial planning specialist at Grover Financial Services.
That's why Grover recommends adjusting your tax withholdings on your W-4 at work. That way, the money you typically wait to get at tax time hits your bank account on a regular basis during the year. That will help smoothen out your cash flow. Ideally, after filing your taxes, you shouldn't owe any money to the IRS or get a sizable refund, either.
To make the most of your refund this year, ask yourself: "What would have I done with the money if I had it during the year?" said Featherngill. Just like a stock investment, your goal is to earn a solid return on your IRS refund.
Pay Off High-Interest Debt
Debt is a drag on your personal finances. So, if you've got credit card debt with sky-high interest rates, knock the debt out or trim it down with your refund.
The average rate charged on plastic is 20.09%, according to Bankrate.com data through March 19. And while that's down from a record 20.79% back in August, spending 20% more on items you buy with credit when you carry a balance is pricey.
Paying off a high-rate credit card will net you a big return. If your card charges you 21%, that's the return you'll get if you pay it off.
"There's no way you can earn that type of return in the financial market on a repetitive basis," said Jamie Cox, financial advisor and managing partner at Harris Financial Group. "So, extinguish debt."
Invest In Your Future
A refund of $3,271 today can add up to big bucks down the road if you invest it. If you're debt free, the next step is to max out your 401(k) or IRA if you haven't already.
If you have an IRA, simply write a check for the full amount of your tax refund and contribute to your IRA. The IRA contribution limit for 2024 and 2025 is $7,000 — or $8,000 if you're 50 or older. So, your tax refund could fund half of your IRA.
A one-time deposit of $3,271 might not sound like much. But a 35-year-old who invests in a stock fund that earns 10% per year, on average, and holds it 30 years until retirement at age 65 in an IRA would see that small deposit grow to $57,077. And if you invest your IRS refund in a Roth IRA, that $57,000 is yours tax-free when you withdraw it in retirement.
"Use that refund money which was out of sight (and) out of mind as an investment," said Cox. "Down the road you could have substantially more than what the refund amount was."
Another strategy is to use the extra money to contribute more to your 401(k). The goal, of course, is to max out your 401(k) contributions so you can benefit fully from the tax benefits as well as build your nest egg. So, contact your employer and boost the amount for your 401(k) coming out of your paycheck each pay period to equal the freed-up money from your tax refund. Given the average refund this year, you'll be saving and investing about $300 more each month, Cox estimates.
Use A Tax Refund To Rebalance Your Portfolio
Another tactical move is to use your tax refund to rebalance your portfolio, says Featherngill. Let's say your portfolio mix of stocks and bonds has gotten a tad too stock-heavy due to the market run-up in 2023 and 2014. You could use the $3,000 and make a deposit to the fixed-income portion of your portfolio.
It's common for U.S. workers to accumulate most of their money in workplace retirement accounts like 401(k)s or 403(b)s. The problem is that in most cases you can't get that money before full retirement age without paying a tax penalty. That causes a lack of liquidity and makes it harder to get your money when you need it.
To dodge that trap, consider investing your tax refund in a taxable brokerage account. That way, you get the benefit of stock market growth or income from bonds but also can tap the money whenever you want. You'll have to pay capital gains taxes, of course, but you'll avoid tax penalties.
"If you find you don't have many liquid assets, putting the money in a brokerage account could give you the access to your cash that you need," said Featherngill. Having cash also minimizes the possible need to take a loan from your 401(k).
Take Advantage Of The Stock Market Correction
The stock market is experiencing its first correction (a drop of 10% from a prior high) since 2023 due to uncertainty surrounding President Donald Trump's economic policies, especially tariffs.
With shares of many high-quality companies down even more than 10%, now might be a good time to scoop up stocks with your tax refund, Cox contends. There are a few approaches to consider. You could invest in a beaten-down powerhouse stock like Nvidia if you follow sound investing rules. You could also take advantage of a rise in foreign stock markets by investing in a total market international fund.
But don't just buy a stock because it's down a lot, says Featherngill. Make sure the company's fundamentals remain strong.
"First and foremost, it has to make sense from an investment standpoint," said Featherngill. She recalls buying land and thinking she got a good deal back in 2008. But prices went lower after her purchase. "Just because it's selling at a discount doesn't always mean it's a good investment," she said.
If you think the market has more downside, you could also treat the proceeds of your tax refund as "dry powder" and reinvest it at even lower prices, adds Featherngill.
Use Your Tax Refund To 'Buy Time'
Sometimes, socking away money for retirement or paying off debt isn't the best use of freed-up cash. Often, it's a better idea to use your tax refund to buy yourself and your family more time, says Grover.
Grover, for example, said he and his wife, Karey, opted to hire a house cleaner to free up more time to spend with their children. "We're no longer chasing the kids around and then have to come home and dust and sweep and clean toilets," said Grover.
Time is often more valuable than money. "Utilize the money to give yourself back time," said Grover. "Time is the one thing that you can't replenish once it's gone."
Use Your Tax Refund To Beef Up Your Emergency Fund
To avoid wracking up debt in the future, restocking your emergency fund with cash from your tax return makes financial sense, says Cox. Deposit the money into a high-yielding savings account so you can benefit from interest. If you shop around, you can earn as much as 4.5% on your cash in a high-yield savings account, according to Bankrate.com.
Should you use tax refund to pay for vacation?
It's better to pay for a vacation with cash than to charge it on your credit card. And after working hard all year, if you can swing a vacation, go for it. "It's akin to preventing the accumulation of debt in the future," said Cox.
