Putting Your Tax Refund to Work

This commentary was originally posted on April 9th.

As the tax filing deadline draws closer, taxpayers receiving refunds this year may be seeking some guidance on where to spend those funds.

So far, roughly 80 million taxpayers have filed their income taxes, according to IRS figures as of March 21, 2025. The average refund to date is $3,221.

Most respondents in a recent survey (79%) said they anticipate a tax refund this year and 77% plan to spend it on necessities. In the survey of 2,000 taxpayers, 52% said they will pay rent, 44% will spend it on groceries, and 37% said pay down debt, 22% add to savings and 20% cited home repair. Only 8% said they plan to spend it on luxuries, with 37% noting they will buy new clothes, 28% will spend it on entertainment, 26% cited a new phone, 24% said gifts and 23% will spend it on a night out.

Among those choosing to invest the funds, 32% of men said they plan to invest compared with 11% of women.¹

Many respondents (43%) said they plan to submit their filing early. Among those, 46% of Millennials said their tax refund is “very important” to their budget planning.

The average tax refund has increased in recent years.

Receiving extra cash can create an opportunity to contribute to retirement savings or other priority saving goals. Investors may want to check in with an advisor to determine the best way to use the funds.

Here are some ideas for those saving their tax refund.

Pay off debt

Multiple surveys point to paying off debt as a priority among savers. Depending on the investor’s situation, this could mean reducing credit card or student loan debt. Consumer credit soared in February, rising to an annual rate of 11.4% from 2.4% in January, the Federal Reserve reported. This is the highest rate since November 2001. Revolving credit, which includes credit cards, rose at a rate of 20.7% in February from 4% in January. Nonrevolving credit (student and car loans ) rose 8.4% compared with 1.9% in the previous month.

Add to an emergency fund

Most households recognize the importance of emergency savings. These funds became particularly important during 2020 for many families facing economic challenges due to the pandemic.

Still, it is not always easy to save. In a Federal Reserve survey, many investors (36%) reported they would not be able to cover a $400 emergency expense with cash or a cash equivalent in 2020. For those unable to cover the expense, 15% said they would put it on a credit card and pay it off over time, 9% said they would borrow from family or friends, and 6% said they would need to sell something.

Unexpected medical expenses can also present challenges. The report found that 17% of adults had major, unexpected medical expenses during the 12-month period, with the average amount ranging from $1,000 to $1,999. Among respondents, 16% had debt from their own medical care or that of a family member.

Opinions vary on how much people should save in their emergency fund, but the assets should cover basic expenses such as rent or mortgage and other regular payments, as well as extra funds for unexpected expenses including car repairs or medical costs. Some investors try to save enough to cover three to six months of expenses. A professional advisor can help set a goal for this account, depending on the individual’s financial situation and ability to save.

Open a Roth IRA

Contributions to a Roth IRA are not tax-deductible, but appreciation, as well as withdrawals in retirement, are tax free if requirements are met. Roth IRA accounts can also help savers establish tax-diversification among retirement assets, which can be used as a tax-smart strategy in retirement. Some investors may not realize that a Roth IRA can be used to help save for a child’s college costs, and if the money is used for education, the 10% early withdrawal penalty is waived.

Contribute to a 529 savings plan

Family members or friends can contribute to a 529 college savings plan on behalf of a child. Earnings grow tax free and are not taxed when used for qualified higher education expenses.

Fund a health savings account (HSA)

HSAs are typically offered to individuals enrolled in health insurance plans with a high deductible. Most HSAs are available through an employer. But under the Affordable Care Act, individuals may purchase an HSA through a state exchange. There is no time limit for distribution of the funds, and these accounts are portable.

HSAs also offer a “triple tax benefit” for savers. Contributions are made with pretax dollars, assets grow without incurring a tax on the interest, and money withdrawn is tax free as long as it is used for qualified medical expenses.

The annual contribution limit for individuals is $4,300. For family coverage, the limit $8,550.

Contribute more to workplace savings

Individuals with access to a retirement savings plan at work may want to use the funds to ensure they take advantage of the maximum savings allowed. For example, a new provision beginning this year allows those aged 60-63 to make higher catch-up contributions in certain plans.

Seek advice to take advantage of the tax landscape

With most taxpayers planning to use their refund to improve their overall financial situation, it may be an opportunity to include a financial professional in that discussion. For example, those receiving a higher refund may want to adjust withholding from their wages. The downside of receiving a tax refund is losing access to those funds, or earning interest, during the year. A review of your overall financial plan may help optimize the benefit of that refund on your budget.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

^1. Source: “Study: 79% of Taxpayers Expect a Refund and Already Know How They’ll Spend It.” Tax Slayer. January 28, 2025. Data as of December 20, 2024.

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