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7 Smart Things to Do With a Tax Refund

Having an extra $3,000 in your pocket from a federal tax refund can make you feel rich — until you start considering the many ways you can spend it.

If you’re not going to pay down debt or save it, there are plenty of ways to spend it and get rid of that hole burning in your pocket: Go on vacation, repair the house, but a TV or computer. The list is endless.

The average tax refund in 2013 was $2,755, and about three of four filers typically receive tax refunds, according to the IRS. That’s a fair amount of money to have in your hands. But it can be a lot less money if you’ve already planned on how you’re going to spend it before you get it.

There are smart and dumb ways to use it. What you decide to do with a refund depends on how well your personal finances are in order, and if you’re a saver or a spender. Spending money is easy. It’s the savings part that’s difficult. Since a tax refund can be like found money that won’t affect your lifestyle anyway, saving it should be easy.

After talking to financial planners, certified public accountants and other tax and finance experts, we came up with seven smart things to do with a tax refund:

1. Don’t get a tax refund

This sounds counterintuitive, but avoiding getting a tax refund is a good idea if you want to keep more of your money throughout the year.

“You shouldn’t ever get a really big refund,” says Nancy Coutu, a certified financial planner and owner of Money Managers Advisory in Oak Brook, Ill. “A lot of people think that’s a good thing, but really, you’re just giving the IRS an interest-free loan for a year.”

2. Pay off credit cards

There’s no tax benefit to carrying credit card debt, so paying off such debt should be the first priority with a tax refund, financial experts say. Paying interest on credit card debt can put you further in a financial hole, and high interest rates will negate any earnings on savings that you might get if you invest the refund.

Alan Moore, a certified financial planner and founder of Serenity Financial Consulting in Milwaukee, says he’s seen more clients move from spending a tax refund on shopping sprees and vacations to paying off debt.

“When large chunks of money arrive, such as with a tax refund, the money is being put toward whatever is most stressful for the taxpayer, and many times now this is debt,” Moore says. “It is actually a great way to utilize a tax refund,since paying down high interest debt is like earning that same interest rate in the market.”He gives an example of paying off a $1,000 credit card balance at 25% interest is the same as investing the $1,000 in the market and getting a guaranteed 25% return.

You may also want to consider paying off other debts, or at least taking a big chunk out of them, says Jordan Niefeld, a certified public accountant in Miami, Fla.

“Step one is trying to eliminate all types of debt,” Niefeld says. “Or at least trying to get them down.”

3. Build an emergency fund

If you don’t have an emergency fund set up to help pay the bills if you lose your job or have a major bill such as a car repair, then a tax refund is a good start.

Having six months to a year’s worth of living expenses saved up is a smart idea, and will keep you off the street if a financial emergency happens in your life.

4. Save for retirement

Whatever type of retirement account you have, including getting started with a new program being set up by the federal government, saving for retirement is one of the smartest things to do with a tax refund. Compounding can work miracles.

“If you spend it today instead of saving it, you’re not giving up $5,000, you’re giving up that larger amount,” possibly around $20,000, says Stuart Ritter, vice president and senior financial planner at T. Rowe Price.

[pull_quote align=”left”]”No one ever saved $1 million instantly. They saved smaller amounts consistently, year over year over year,” says Stuart Ritter, a senior financial planner at T. Rowe Price.[/pull_quote]”No one ever saved $1 million instantly,” Ritter says. “They saved smaller amounts consistently, year over year over year.”

Building wealth over the long-term can be a lot more fun than blowing money as soon as it comes in.

“I always tend to recommend buying conservatively and investing it instead of going out and having a big party or something like that,” Niefeld says.

5. Open a college fund

Saving for a child’s college expenses by investing money from a tax refund every year in a college savings fund can be especially smart, Coutu says.

Putting just $2,000 a year into a college fund can add up to $100,000 if done for 18 years from a child’s birth, she says.

6. Save to buy a house

This is another area where putting aside a big tax refund every year for five or so years can lead to a big amount of money saved, and can help put a good down payment down on a house. Where you put the savings depends on your priorities.

“It’s an opportunity for people to sit down and consider what’s most important to them,” Ritter says.

7. Donate

Donating money from a tax refund to a charitable cause can continue the tax savings, Coutu says, because you’ll get a tax benefit this year that could carry over with a bigger tax refund the next year.

Unfortunately, most people are likely to spend a tax refund instead of saving it, she says. Like the child who wants to go outside and play before eating his vegetables, it’s difficult to do the serious work of saving money for the future.

“People are most likely to spend it because it’s found money. It’s like winning the lottery,” Coutu says.

How do you plan  to spend your tax refund? Tell us in the comments section below.

About the author

Aaron Crowe

Aaron Crowe

Aaron Crowe is a freelance journalist in the Bay Area who specializes in personal finance. He has been a writer and editor at newspapers and websites, including AOL's personal finance site, WiseBread, Bankrate, LearnVest, AARP and other sites. Follow him on Twitter at @aaroncrowe, or at his website,


  • I am paying off ALL of my debt. … After pulling my credit report and seeing how little I actually owe I’m ashamed for waiting years to become free of this burden. I’ve since been making ALL payments before time or on time in hopes of getting a credit score high enough to purchase my first home! Thank you for the tips -I’m putting them to good use!!!! #sofocused

  • Haven’t filed taxes yet, but working on them. I have combo of 1099, W2 and LLC $800 tax bill. I’m looking to getting a refund since my W2 helps to off set 1099 tax with write offs. Refund will go to ER MD bill of $397 and toward LLC tax.

    So far have saved $6750 with Projected $550 from one source and $300 from another source. Goal is $21000 for emergency money.

    Have Payment arrangement of $100 ea for a Ambulance and ER bill. Ambulance will be paid off in Aug, and what I paid to this bill will be added to ER bill, plus what I pay to a personal loan; for a total of $400; scheduled to pay off in October

    My personal loan principal of $2520 since June 2013. I’ve paid well over min. And bal down to $787; scheduled to pay off this June.

    My Cap 1 credit card increased $2000 more in credit for keeping bal. between 10-30 percent for 6 months My Goal is $10,000 in credit within the next 24 months.

    I am always looking at ways to make money to pay bills and had to Savings.

    FYI: Taking Trip to UK and Paris in September. Tickets and B&B paid already.

    • Hi There,

      Sounds like you really have all of your ducks in a row! It’s great that you have the extra funds to travel this year, I hope you enjoy every second–you earned it!


  • I paid off 6 cards with mine so far, small amounts, $600 and less, but less debt is less debt! The remainder is going into home improvements and a camping trip for the kids.

    • Hi April,

      I can’t agree with you more when you say “less debt is less debt.” No matter how small, every step you take towards the ultimate goal of being debt-free is important!

      All of your hard work will pay off–please check back in with us to share your successes!


  • I won’t be getting a refund! I owe 2000 dollars but no penalty because I use safe harbor rules! I invested that extra in payment of of old debt and now I’m without any bills.

  • After disputing several erroneous items on my credit report, I raised my score from the low to mid 600s to the mid to high 700s. I increased my credit limit on the only credit card I have and am now working the balance down towards 50% and below. This year, my refund is going towards that credit card to take me closer to my goal of becoming completely debt free. Thank you.

  • I appreciate the information you shared about saving. I unfortunately lost my job last year of 13 years and was making about 36-48 thousand a year. I tried to file my taxes, unfortunately I was told that I now have to pay money back to both Federal and State. The Preparer wanted me to add my youngest daughter back on taxes, she no longer lives with me and is 21 years of age. I ended up depleting my 401K as well as my savings. Currently looking for employment with no luck. Student loans are in default, I lost my house but yet I have my vehicle’s. Credit card debit is past due because I have no income coming in at all, Thankful that the companies are working with me.
    I really appreciate the vital information you and others share. Once again Thank you.

  • I used half to pay off old collections accounts and the other half I put into savings. I plan to save in regular increments in 2014 to be able to buy a house in 2015!

  • my husband and I are tithing, paying down debt, saving for an emergency fund, getting a secured card and investing into staring a business online. We’ve paid off 9,845.07 in 10 months and getting ready to be credit card debt free. Always have a plan for money. Those who fail to plan plan to fail

  • I opened a savings account for my 3 children. I am also working to rebuild my credit so I also paid down my student loan to $300 and set up a payment plan to pay the remaining in increments of $50 each month for the next 6 months. I am also working on paying off some medical collections once my credit dispute process is complete. I also got 2 secured credit cards and put the rest in my savings account.

    • Hi Ty,

      That’s great! Thanks so much for sharing your successes, and I wish you the best of luck in the rest of your journey to improve your credit. Keep sharing your wins!


    • Hi Marcos,

      It’s great to hear about you and the many others who are smartly investing their tax refund and making the most of it. Keep checking in to let us know how your investment pays off.


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