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5 Smart Things to Do With Your Tax Refund

If you think you’re going to get a tax refund, consider how you can put that extra cash to good use. Here are five ideas.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Tax return: 5 ideas for refund cash
5 min read
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Key Takeaways

  • Consider a bucket strategy of saving, spending, and charity
  • If you have high-interest debt, consider paying it down first
  • It’s okay to invest in yourself

Getting a tax refund? You’re not alone.

Last year, the Internal Revenue Service issued more than 111 million tax refunds, with the average check amounting to $2,869. We won’t get into the debate about the pros and cons of receiving tax refunds. Instead, let’s look at some savvy ways to handle that windfall.

Here are five smart things to do with your tax refund:

  1. Make a plan.

    Tax refunds usually take a week or two to arrive, giving you plenty of time to decide where to put the money to work. Planning what to do with the funds means you’ll be more thoughtful and intentional with that cash. Otherwise, it could easily be siphoned off and disappear.

    Dara Luber, senior manager of retirement at TD Ameritrade, suggests looking at a tax refund in the context of household budgeting and a “three-bucket system” of saving, spending, and charity. Savings can be earmarked several ways. A portion can be devoted to a major purchase, such as saving for a new home or car. Some of it can go to retirement savings or toward a child’s 529 plan. Those last two may also be tax write-offs, especially if the retirement money goes into a traditional individual retirement account. Getting a potential tax write-off already puts you ahead for next year.

    Speaking of tax write-offs, depending on how you file, money that you earmark for charity may be tax deductible, too. Many charities receive money at the end of the year, but they can use funds at any time. Keep in mind that donations can be cash or stock. So if you were planning on investing part of the refund, donations of stock in lieu of cash can help both you and the receiver.

    Remember, though, the IRS has a list of rules, limits, and qualifications regarding charitable deductions. If you’re unsure, consider talking to a financial advisor for more detail.

  2. Pay down debt.

    If you have some outstanding debt, especially something like high-interest credit-card debt, consider wiping the slate clean and using the tax refund to reduce or retire that debt. A tax refund can also be used to apply an extra mortgage payment to your home loan without busting your monthly budget. People who can make an extra payment a year on their mortgage on a 30-year loan may cut as much as four to five years off the life of the loan, depending on interest rates.

  3. Add value.

    If you own your own home, one way to spend that cash is to look at home improvements. “Although a tax refund won’t cover a full kitchen or bath renovation, there are ways you can target a tax refund in a way that adds value to your home,” Luber suggested. That’s particularly true if you’ve deferred maintenance on a part of the home. Some inexpensive ideas might include refinishing kitchen cabinet doors, installing higher-end bathroom fixtures, or improving curb appeal.

  4. Invest in yourself.

    There are a couple of ways to look at this. Work-related classes can pay future dividends. Look for classes that can help you increase your earning potential, especially for millennials and Gen Z, but even for Gen X, who still have a good decade or more to go before retirement. Depending on how you file, work-related education may be eligible for a tax write-off.

    Not all investments in yourself need to be work-related. You could take a class that improves another part of your life. Fitness classes, cooking classes, art workshops, and spiritual retreats are all investments in yourself.

    Strengthen bonds that have nothing to do with fixed income. Consider memory-building experiences with friends or family. A tax refund check isn’t going to pay for a trip to Tahiti, but it can pay for a weekend getaway with the kids, or a retreat with friends.

  5. Don’t blow it all on something frivolous.

    Listen, we get it. We’re all drawn by the bling. But don’t let that shiny, bright object consume your whole refund, or worse, actually put you in debt. It’s completely fine and even healthy to treat yourself. But don’t go overboard. It’s like when you were a kid and a parent said you had to finish your veggies before you got dessert.

    Once you’ve taken care of the necessities—including saving for the future—it’s okay to indulge in a bit of travel, some new shoes, or whatever feeds your “sweet tooth.”

    But before you buy on impulse, ask yourself if you really need the item or whether it will help you get to where you want to be.

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Key Takeaways

  • Consider a bucket strategy of saving, spending, and charity
  • If you have high-interest debt, consider paying it down first
  • It’s okay to invest in yourself

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