Receiving a tax refund is often a welcome windfall—and one you can use in many ways. According to the IRS, the average tax refund for 2023 is $1,963. This year’s refunds may be slightly smaller than last year’s as there are fewer available deductions, and taxpayers can’t claim unpaid stimulus funds.
However, regardless of the size of your refund, planning how to use the money can ensure you make the most of those funds. Consider these six options for optimizing your refund and getting exponential benefits from the extra cash.
1. Create emergency savings accounts
If you haven’t already, now is a great time to create an emergency savings account. Use your tax refund to get your savings safety net started. Financial advisors typically recommend setting aside three to six months’ worth of expenses in case of an unexpected crisis.
Your tax refund can fuel your first efforts at establishing an emergency savings account or add to your current savings. Be sure to save these funds in a saving account (instead of within your checking account), so you don’t inadvertently spend them. At Valley Bank, you can open a savings account for $100—even better, there are no monthly fees, and you earn interest on your savings.
2. Pay down high-interest debt
The average credit card interest rate is 19% for existing accounts and 21% for new accounts. If you’re carrying a balance on a credit card, you’re paying a premium to borrow that money each month. You can use your tax refund to help pay down some of your existing debt and reduce the amount you pay in interest along the way. Doing so will also free up funds that you can use for other expenses or savings. You’ll also save money over the long term by avoiding paying that extra interest on the balance.
3. Give your retirement savings a boost
Tax refunds are a great way to supercharge your retirement savings. Thanks to compounding interest over the lifespan of your savings, even small windfalls added to your retirement nest egg can help yield significant results down the road. If you still need to create a dedicated retirement savings account, you could use your tax refund. Connect with your banker at Valley Bank to open a tax-friendly Individual Retirement Account with a minimum deposit of $250. Then keep the momentum by setting up automatic deposits from your checking or savings accounts.
4. Supplement your higher education savings
If saving for college is top-of-mind, consider using your tax refund to start or contribute to a 529 college savings plan. These plans provide a tax-advantaged way to save for qualified education expenses, including college and K-12 private school tuition and even student loan repayments. The benefits of such plans help stretch your education dollars—the money you contribute grows tax-free, and you can also withdraw it tax-free. And just like retirement, saving even small amounts helps. The sooner you start saving for higher education costs, the more your interest can work in your favor.
5. Fund a health savings account
Your tax refund can also help fund a Health Savings Account (HSA), which offers tax benefits for the money you save and use for healthcare expenses. Check with your employer to see if your benefits include an HSA. These types of savings accounts are typically provided alongside high-deductible health plans. With a health savings account, you contribute pre-tax dollars. In doing so, you can reduce your taxable income and save on healthcare expenses. However, it’s important to note that you must spend the money within HSAs on qualified healthcare expenses. If you withdraw the funds for other purposes, you can face a 20% penalty.
6. Do something that brings you joy
If you’ve dialed in your savings and are satisfied with your financial path, consider using your tax refund for an experience that makes you happy. For example, plan a fun weekend with family or friends, get started with a new hobby, or visit a place you’ve never been. You can celebrate your windfall by creating a lasting memory that’s worth even more than your tax refund.
Be aware of refund scams
Unfortunately, scammers have long used the promise of tax refunds as a way to steal information and money. Some scammers will call or email people, pretending to be the IRS, to ask for bank account information to send your refund. The IRS notes that these calls are bogus—the tax agency typically communicates by mail and doesn’t call people about refunds. If you have a question or concern, you should reach out to the IRS directly and don’t give any unknown person or entity your bank information.
Connect with Valley Bank
Tax refunds can provide a windfall that you can use in multiple beneficial ways, from supplementing your emergency savings to boosting your retirement nest egg. Connect with your Valley Bank representative to explore how our savings options can help you make the most of your tax refund.