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What to do with your tax refund

Key takeaways

  • Putting your tax refund to good use could save you money or potentially grow it over time.
  • Treating yourself with a portion of your refund could help you stay on track with long-term money goals.

Getting your tax refund could be a special kind of pay day. Unlike your regular income, you might not already have your tax refund earmarked for specific expenses. So how do you decide what to do with your tax refund? The money moves below could help you turn that fast cash into potential lasting savings.

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What is a tax refund?

First, a definition: A tax refund is a reimbursement from the IRS if you paid too much in taxes throughout the year. This can happen when you withhold too much in taxes from your paycheck. (If you're considered an employee, you may be able to see withholdings on your pay slips or on Form W-2.) When you file an annual tax return, you have a chance to ask for that money back.

Keep in mind that not every filer is entitled to a tax refund. In fact, in tax year 2023, 35% of taxpayers didn't receive one.1 But if you do get some dough back, your tax refund might be a nice chunk of change. The IRS says that the average refund given in 2023 was around $3,167.2

That much could be a game-changer—if you use it well. Here are 9 smart ideas for what to do with your tax refund.

1. Save for emergencies

Emergency savings could help you handle an unexpected bill without having to rely on credit cards. Having emergency savings is especially important today: A January 2024 Bankrate survey found that almost 56% of American adults couldn't afford to pay a $1,000 emergency expense from their savings.3 That could mean taking on high-interest debt if you were to get hit with a surprise charge, which would make it harder for you to save in the future.

Fidelity suggests having at least $1,000 on hand as a cash buffer. Eventually, you'll want 3 to 6 months' worth of essential expenses (think: food, utilities, housing) in your emergency stash.

2. Save more for retirement

Consider using any windfall to build up retirement savings. That's because investing your money over the long term in a tax-advantaged account could help your dollars go further, thanks to the potential of compounding (or when the returns on your money start making money). If you're not already contributing enough to a 401(k) or 403(b) workplace retirement plan to capture the maximum match your employer offers, you could start there. You could also consider contributing to a traditional IRA or a Roth IRA with your tax refund.

3. Pay off high-interest debt

About 70% of millennials and 52% of Gen Zers in large metro areas have credit card debt.4 Assuming you have already met your employer match, you can use your tax refund to pay down credit card debt first. Then, if you have any other debt with an interest rate of 6% or higher, move on to that. That head start could help you chip away at debt faster instead of letting it snowball. Even if your refund doesn't pay off all your debt, tackling any size chunk could make it easier to ultimately finish paying it off.

4. Splurge responsibly

It's OK to treat yourself with a portion of your tax refund—just do it mindfully. For example, you might choose to spend 10% of your refund on something fun, then save the rest. Bonus: That small instant gratification could actually improve your finances over the long run. Research shows rewarding yourself for making smart money moves could keep you motivated to keep going.5

5. Stash it away to pay taxes next year

Especially if you're self-employed or your salary varies from year to year, it could be wise to save this year's excess for a possible tax bill next year. Owing taxes and being unable to pay could lead to costly penalties, so it's better to be overprepared. Plus, if you end up not needing the extra cash next year, all you did was save money—which isn't a bad thing.

Pro tip: You could potentially grow your refund by stashing it in a short-term investment. A CD, a high-yield savings account, or a Treasury Bill (which matures in as little as 4 weeks or as long as a year) could give your refund a little boost come next tax season.

6. Invest in yourself

Think of this as treating your future self. Is there a certification that could help bump up your pay at work? A course that could open up new opportunities? Could talking to a career coach give you some direction? Consider using your refund to turbo-charge your career. If you don't know where to start, ask a more-senior colleague what skill or experience they think has been valuable to them. Then, look around for a course, certification, or advisor that could help you become more marketable.

7. Upgrade your tools

If your job requires you to own your own tools, consider funding an upgrade with your refund. Whether it's a drill with more torque, a faster laptop, or a premium software subscription, your refund could boost your productivity. And time is money. Plus, items you buy for work may be tax-deductible, potentially raising your refund next year. Just keep those receipts.

8. Start saving for the holidays

Sorry to give you chills in spring, but holiday gifts are getting more expensive. In both 2021 and 2022, American shoppers spent around $1,450 on average. They were expected to spend nearly $1,650 on average in 2023—above pre-pandemic levels.6 Even though winter may feel like a long way away from tax season, consider saving your refund now to cover gift-giving later.

9. Buy US Savings Bonds

You could use your refund to buy US Series I savings bonds by filing Form 8888 with your tax return. Series I savings bonds, aka I bonds, are a lower-risk investment that come with 2 interest rates for a single bond:

  1. A fixed rate determined based on the 6-month period in which it was purchased that stays the same for the life of the bond.
  2. A variable rate that changes every 6 months based on inflation, specifically Consumer Price Index (CPI) numbers.

So higher inflation means higher variable rates and a total combined rate that could be higher than what other types of investments offer. On the other hand, lower inflation could mean lower variable rates. You can cash in I bonds after 1 year, but if you cash in before 5 years you lose 3 months of interest.

You can buy up to $5,000 in paper I bonds with your refund. That's on top of the typical $10,000 annual limit for I bonds bought electronically from the Treasury directly. And you can still get any leftover money from your refund via check or direct deposit.

Yes, a tax refund can be a welcome surprise. But you may be better served holding onto that money throughout the year. If you receive a refund each tax season, it may be because you are over-withholding income tax from your paychecks. To help fix that, consider asking an HR rep at your company for help updating Form W-4. Then, you may be able to look forward to a regular meatier paycheck.

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More to explore

1,2. "2023 filing season statistics - Individual income tax returns," Filing season statistics for week ending Dec. 29, 2023, IRS. 3. Lane Gillespie, "Bankrate's 2024 annual emergency savings report," January 24, 2024. 4. Kamaron McNair, "Debt By Generation: How Non-Mortgage Debt Breaks Down for Gen Zers, Millennials, Gen Xers and Baby Boomer," LendingTree, August 9, 2021. 5. Emily Lorsch, "How giving yourself gifts can help you save more money," CNBC, June 25, 2022. 6. "2023 Deloitte holiday retail survey," Deloitte.

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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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