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Wondering What to Do with Your Tax Refund? 9 Strategies to Consider

Post on April 18, 2023 in Blog

As tax season comes to an end, are you one of the many filers wondering what to do with your tax refund? There’s a wide range of options to consider, and over the last decade, the trend has shifted from frivolous to financially strategic. 

In 2011, for example, 57% of participants in a Reuters survey indicated they’d use a portion of their refund for a vacation amidst a sluggish economic rebound.

Fast forward to today, a recent Bankrate survey reveals a more financially prudent mindset, with only 7% planning to use their refund for a vacation and over half of respondents looking to pay down debt and boost savings with the extra cash on hand. 

We’re all for taking the time you need to recharge (shoutout to Alto for that open PTO), but using your tax refund strategically can set you up for financial success and a more stress-free future vacation. In light of Tax Day, let’s explore 9 savvy strategies for utilizing your tax refund to its maximum potential. 

1. Pay Off High-Interest Debt

Taking the crucial step of addressing high-interest debt, especially credit card debt, is among the most consequential financial decisions you can make, as the heavy interest burden can quickly spiral out of control if not managed appropriately. 

By prioritizing the payment of these high-interest debts, you’ll not only significantly reduce the amount of interest you are required to pay over time, but also decrease your credit utilization ratio, which can improve your credit score.

A higher credit score may open up new financial opportunities, such as access to better loan terms or lower interest rates on future borrowing.

2. Establish an Emergency Fund

An emergency fund serves as a financial safety net to help you navigate unexpected events and challenges that life may throw your way. Such events can include job loss, medical emergencies, costly car repairs, or any other sudden expenses that could potentially disrupt your financial equilibrium.

In an ideal scenario, your emergency fund should be robust enough to cover a minimum of three to six months’ worth of living expenses, including rent or mortgage payments, utilities, groceries, and other essential costs. 

This buffer ensures you have time and resources to recover from unexpected financial setbacks, ultimately providing you with a sense of security and peace of mind.

If you lack an emergency fund or if yours isn’t fully funded, your tax refund can be an excellent opportunity to establish or augment this essential financial resource.

3. Save for Major Purchases

If you have plans for a significant purchase, such as a home or a car, using your tax refund to start or grow a savings fund for that purpose is a wise move. By doing so, you can avoid taking on additional debt when the time comes to make the purchase. 

Additionally, to optimize the growth of your savings, you might consider opening a high-yield savings account.

By depositing your tax refund into a high-yield savings account, you are not only earmarking funds for your future major purchase but also taking advantage of an opportunity to earn interest.

4. Invest in Education

Investing in your education can significantly increase your earning potential over your lifetime. Using your tax refund to take classes, attend industry-specific conferences, or earn certifications in your field can increase your knowledge and skills, as well as make you more marketable to employers.

Alternatively, if you are a parent, you might consider putting your tax refund toward your children’s education. One popular choice for long-term educational savings is a tax-advantaged 529 plan.

Plus, thanks to the SECURE 2.0 Act, if your child chooses to forgo a post-secondary education, you can roll over 529 plan funds maintained for at least 15 years into a Roth IRA, assuming all criteria is met, with a $35,000 lifetime limit.

Note that this provision of the SECURE 2.0 Act doesn’t go into effect until 2024. So you’ll need to hang onto that refund for a bit to take advantage of this strategy.

Read more: What the SECURE 2.0 Act of 2022 Means for You

5. Start or Grow a Business or Side Gig

Using your tax refund to start or grow a business or side gig is a smart investment that can help you create an additional income stream. With your tax refund, you can invest in essential resources such as inventory, equipment, or marketing initiatives to boost your venture’s growth. 

For example, you could use the money to purchase materials for your handmade crafts business, upgrade your camera lens if you’re a freelance photographer, or invest in targeted online advertising for your e-commerce store.

Just know that you’ll need to keep track of your income and report it to the IRS come Tax Day, and failing to do so could result in penalties.

6. Make Home Improvements

Spending your tax refund on home improvements can be a wise move for several reasons. These enhancements don’t just increase the overall comfort and functionality of your living space. They can also potentially boost your home’s market value, making it a more attractive option for future buyers. 

Additionally, certain improvements can lead to long-term savings on energy bills by improving your home’s energy efficiency, such as upgrading insulation or installing energy-efficient appliances.

Furthermore, tax credits or deductions may be available for specific eco-friendly upgrades, enabling you to potentially recoup a portion of the costs. 

7. Donate to Worthy Causes

If you’re in a stable financial position, you may consider donating a portion of your tax refund to a charity or nonprofit organization that you believe in. Donations often provide crucial financial assistance to charitable organizations that rely on outside contributions to operate.

Plus, your donation to a tax-exempt organization could potentially be tax-deductible, thereby reducing your taxable income and ultimately lowering your overall tax liability.

This incentivizes individuals to engage in philanthropic activities, promoting a cycle of giving and support for worthy causes.

8. Invest for Your Future

Your tax refund presents an opportunity to invest for retirement. The good news is the IRS recently increased contribution limits for the 2023 tax year, so you may choose to increase your 401(k) contributions or max out your IRA. The earlier you start investing, the more time your money has to grow through the power of compound interest.

Read more: What the 2023 IRA Contribution Limit Increase Means for You

In addition to traditional investment options, you may want to consider allocating a portion of your retirement funds to alternative investments, which offer the potential for higher returns.

Alto enables you to diversify your portfolio and access investments beyond stocks and bonds, providing a more balanced investment strategy for your future.

9. Treat Yourself (Responsibly)

One of the keys to maintaining a healthy financial lifestyle is striking the right balance between making responsible spending decisions and using your money to create a fulfilling life.

While it’s important to prioritize paying off debts, saving, and investing, it’s equally important to remember that life is meant to be enjoyed, and rewarding yourself occasionally can help keep you motivated in the long run.

After addressing your primary financial concerns, consider setting aside a portion of your tax refund to treat yourself. This can take the form of a small indulgence or an enriching experience, depending on your preferences and budget. Some examples include:

  • A weekend getaway to unwind and recharge without breaking the bank
  • A special dinner at a restaurant you’ve been wanting to try
  • A new hobby or class, such as painting, dancing, or cooking
  • A self-care day, complete with a massage, facial, or spa treatment

How Will You Use Your Tax Refund?

As you decide on the best course of action for what to do with your tax refund, remember that these funds can provide a unique opportunity to improve your financial situation. By considering the strategies discussed in this article, you can make informed decisions that align with your financial goals and priorities.

Whether it’s paying down debt, investing in education, or giving back to your community, your tax refund can be the catalyst for lasting financial success and personal fulfillment. Happy Tax Day!