Investing your tax refund is a great way to start building wealth.
If you received a tax refund from Uncle Sam this year, you shouldn’t be celebrating just yet. Aside from the fact that it was your money to begin with (and not a friendly gift from the government), you may have to make some adjustments before next tax season starts.
If too much of your paycheck is withheld, you’re lending your money to the government for free. What’s worse is that you lose out on time that your money could grow to your advantage. If this is the case, be sure to adjust your federal income withholding provisions or review your Form W-4.
This doesn’t mean the lump sum from the government doesn’t make you feel good. With that being said, don’t get caught out in handling your refund any differently than you handle your paycheck. Your money has value, and just like your paycheck, every dollar of your refund should have a purpose.
Last year, 2025, average tax refund payments were more than $3,052 According to the IRS. If you’re one of those people who got a tax refund this year, before you blow your tax refund on a vacation or any other big item, first think about some ways you can make that money work for you.
Here are several suggestions on what to do with your tax refund:
1. Contribute to your emergency fund
Have you thought about what would happen if you were unexpectedly laid off from your job, or faced a large unexpected expense? If you’re not prepared for this or a slew of other ordeals you may face, you may want to consider holding on to your tax refund.
It is recommended to have “rainy day” cash for at least a few months. Although some financial experts have said six months to a year of emergency cash is necessary. How much you save for emergencies depends largely on your situation.
Putting some (or all) of your tax refund money into a savings account as your emergency fund can be a smart way to build wealth. This is probably the simplest way to start investing your tax refund. The best high-yield savings accounts are earning over 5% interest now!
Read our complete guide to emergency funds here.
2. Pay off your debts
Perhaps even worse than an unexpected emergency is the current emergency known as debt.
If you’re one of the many Americans facing high-interest debt, you should focus on cutting expenses and putting every free dollar toward your debt. Furthermore, it’s often recommended that you pay off your debts even before building an emergency fund (we disagree, but you still shouldn’t avoid paying off your debts).
The logic behind this is that if you are already in debt and have drained money from your emergency fund, you will have no financial option to borrow money. Borrowing money using credit cards is never an attractive option, but it may be necessary in difficult circumstances.
According to the latest data from ForbesThe average credit card APR is 27.92%. Yikes!
Here’s an example of why you should pay off this debt. Let’s say you owe $2,753 in credit card debt with an APR of 27.92%. If you only make the minimum payment of $200 per month, it will take 1 year and 5 months, and you will pay an additional $603.97 in interest on that amount. If you get your tax refund and pay it, you’ll avoid all that extra interest — saving you $600! Now, you’ll be leaving without a credit card balance — and you can start investing in other areas of your financial life!
Note: If you have student loan debt, now you may no When is the best time to repay these loans (due to loan forgiveness programs and more). Instead, focus on other debts like credit card or car debt.
3. Save more for retirement and other goals
If your financial house is in good shape and you’ve amassed a healthy emergency fund and no longer have debt, another option to consider for your tax refund is investing it.
The average American does not set aside enough money for retirement. Many financial advisors recommend investing 10% to 15% of your annual income for retirement, but obviously with the time value of money, the earlier you invest, the better.
If you start investing late, it’s never too late to bridge the gap. The $3,052 tax refund is sure to help you get closer to your goals. In fact, that amount would be half of what you can contribute to your IRA this year.
Let’s break down what your tax refund investment would look like. If you invested $3,052 at an average return of 9% (which is actually slightly below the historical average for the S&P 500), and didn’t add any other money, you would have:
- After 20 years: $17,104.66
- After 30 years: $40,492.95
This is the power of compound interest! And if you invest your tax refund in your retirement account, that money could be tax-free in the future!
4. Refinance your mortgage or make home improvements
Mortgage rates are at all-time lows. If you’re financially prepared and ready to buy, there’s truly no better time. If you already own a home, you can take advantage of these interest rates by refinancing and paying closing costs and fees with your money back. This will allow you to immediately save money in interest payments.
If you’re really ambitious, you can continue to pay the same monthly mortgage amount, reducing your principal. Furthermore, if there’s a high-dollar project you’ve been putting off, now might be the perfect time to cross it off the list. Home improvement projects are a great way to add value to your home and the benefits are usually immediate.
Related to: Best Places to Get a HELOC Online
5. Invest in a taxable account
If you’ve already maxed out your tax-sheltered accounts, you’re definitely ahead of the pack and probably don’t need to hear this advice. Opening a brokerage account can be a great way to diversify your investment portfolio and make money work for you.
Since these investments are fully taxable, it may be a good idea to move toward lower-cost investments or tax-efficient mutual funds or ETFs.
A taxable account works just like a retirement account — you have your investment portfolio of stocks and bonds. The only difference is that these are not tax advantaged.
6. Giving charity
Depending on who you are, this may be number one on your list. For others on a limited budget, donating to charity may be difficult. Your tax refund is an opportunity to contribute to a charity of your choice.
Giving to charitable causes may not be giving back in the form of dividends or capital gains, but sometimes the benefits a donation can bring are more valuable than anything money can buy. Not to mention, you can deduct charitable contributions from your taxes.
7. Start your own business
If you have a business idea you’ve been putting off, a refund could be just what you need to get things off the ground. This is a great way to see a return on your investment, and you can get tax deductions for your small business as well.
If you don’t know where to start, we have a list of the top 15 online business ideas that you can start right now at home.
Bonus: Change your withholdings so you don’t get a refund
One option you may not have considered is simply changing the tax deductions from your paycheck so that you don’t get a refund — you owe it. This may sound crazy, but remember, a tax refund is just a refund Extra money I paid the IRS all year. It’s your money!
If you change your W4 deductions from your paycheck, you will receive a larger paycheck throughout the year. Then, at tax time, you’ll pay any difference you owe. This is something that most smart investors and high net worth individuals do. Never allow the IRS to take extra money that belongs to you.
The only drawback here: You have to plan to write a check to the IRS in April. If you don’t save or don’t have the money, you could be in trouble. So, before you start adjusting your deductibles, make sure you have a plan.
Final thoughts
No matter how much refund you receive, if you receive a refund at all, your tax refund should be treated at the same value as any other dollar you earned. If nothing else, it needs to be addressed More valuesince you are paid for the work you have done throughout the year.
Whether your money back is expected or not, it should be used in the most beneficial way wherever you are in life. Although it’s tempting to treat yourself to something you want, just like all your hard-earned dollars, investing in something that will move you toward achieving your goals is far greater than any item that can be purchased at a mall.
What other investment ideas do you have for your tax refund?
