If you’re owed a tax refund and it hasn’t already arrived, it’s bound to hit your bank account (or mailbox) sometime soon. As of mid-March, the average refund amount that taxpayers are receiving this tax season is $3,109, said The Wall Street Journal.
Given this is far from an insignificant chunk of change, it’s helpful to have a plan in place for how to use it. While treating yourself to a vacation or retail purchase is an option — in fact, said CNBC Make It, “about 20% of taxpayers plan to use the cash for fun expenses” — it’s not necessarily the choice that’s going to offer the best bang for your buck.
Here are some other options you might consider that can provide some longer-term payoffs when it comes to your overall financial health.
Build your emergency fund
By allocating even just a portion of your tax refund toward your emergency fund, you will end up in better shape when the unexpected happens, whether that’s a costly car repair or an unanticipated layoff.
Experts generally recommend stashing your emergency fund with at least “three to six months of expenses,” said U.S. News & World Report. But if that doesn’t seem like a possibility with your usual paychecks, then “you can use your tax refund to boost that number.”
Pay off high-interest debt
“Households were holding a record $17.5 trillion in debt last year, including record sums tied to their credit cards and vehicles,” said the Journal, citing the Federal Reserve. This tax season, many plan to tap their tax refunds to help pay down that debt. In fact, an estimated “one in five Americans plan to use most of their tax refund to pay down debt this year,” said the Journal, citing Bankrate.
Not only can paying down debt eliminate (or at least reduce) your balance, it can have a cascade of other positive financial effects as well. For instance, said Experian, paying down credit card debt can also allow you to “save money on interest charges,” “improve your credit score by reducing credit utilization,” and “free up available credit so you have it in an emergency.”
Cover necessary repairs and maintenance
If you have your emergency fund well-stocked and your debt paid down (hats off to you), you might consider using your tax refund to tackle necessary maintenance or upgrades for your home or vehicle.
“Think about any big expenses that are likely to come up in the next 12 months and get in front of them. For instance, if your tires are balding or your dryer is making noises, use your tax refund to upgrade. Then you get the joy of spending some money and you also avoid a future financial crisis,” Charlie Corsello Jr., the president and founder of TaxCure, said to U.S. News & World Report.
As an added bonus, this sort of spending can end up benefiting you in the long run. “Using your tax refund to maintain or improve your home can be a good investment in your home’s value,” said Experian, just as keeping your car “in good running order” can mean “you’ll save money on repairs over the long haul.”
Contribute to a Roth IRA or 401(k)
Still searching for ways to use your tax refund? Saving it for your retirement is almost always a smart way to go. While “contributing to any tax-advantaged retirement account is an excellent use of your tax refund,” said Experian, “refund time can be an especially good moment to consider a Roth IRA or Roth 401(k).”
For one, Roth accounts offer “flexibility,” as “if you need to withdraw your original Roth contributions before you reach retirement age, you can do so without tax penalty,” said Experian. Further, there’s the potential for some tax savings, too, since “money in a Roth account grows tax free,” and “when you withdraw your money in retirement, your distributions are also tax-free, unlike withdrawals from a traditional IRA.”