Plan Your Future
Here's what to do with your tax refund
How to spend (or save) your tax refund responsibly
This story is part of our Money Matters series to help you to make the most of your money.
Shortly after Melissa Erb Burgess and her husband bought their first home, in 2016, they put their relatively small tax refund toward improving the place. "We did a pretty substantial remodel," the Portland, Oregon, woman says. "So the refund went towards many trips to the Home Depot."
This year, they plan to allocate a more significant tax refund toward more upgrades: backyard landscaping, or even adding a bocci course. Last year, the IRS reported that, of those taxpayers who received money back from the government, the average refund amounted to $3,120.
With a similar number expected for 2017, Certified Financial Planners™ say having a plan for this money will help many people make the most of it.
Here are six ideas on what to do with your tax refund, from experts:
1. Pay down debt
Since the national household carries an average of $16,000 in credit card debt, Tracy Sherwood, a CFP with Buffalo, New York-based Ogorek Wealth Management, says it's a "no brainer" for people to apply their refunds to reducing credit card balances.
"If you've given the government an interest-free loan for an entire year, you really need to pay down that credit card debt, because you're probably looking at 10 percent to 20 percent interest on those cards," Sherwood says.
For Michael Kalscheur, a CFP and senior financial consultant at Indianapolis-based Castle Wealth Advisors, another popular and tactful debt service reduction option is to use your refund to pay down a student loan.
"Lots of people have multiple loans over multiple years," Kalscheur says. "Usually they apply their refund to the highest-interest one. That way, they can also pay the other loans off faster."
2. Contribute to an IRA
One of the best reasons to put your tax refund toward an IRA, is that your contribution is tax-free up to a certain point.
"With a Roth IRA you can contribute up to $5,500 per year, and it's tax free," Sherwood says. "That's really something that makes more sense for a younger investor, or if you don't have a savings plan at work."
3. Put the money into a 529 College Savings Plan
If you have kids, both Sherwood and Kalscheur suggest applying your refund to a 529 College Savings Plan. Keep in mind that different states have different rules on the maximum contribution each year that qualifies as tax deductible.
4. Invest in your home
"Clients have gotten a sizable refund—$4,000 or $5,000—and have refinished their floors or resided their house," Kalscheur says. "That's a hybrid of investing and spending, because it's improving the value of your home and getting personal enjoyment out of it as well. It's like crossing something off of your list—and that's when people have the most fun with it."
5. Consider a new car
According to the Federal Reserve, 46 percent of families can't afford a $400 emergency expense. In other words, for many people, a relatively minor car repair could be a big problem. If your car's getting older or is no longer suited to your family's needs, your tax refund could be the first step toward finding yourself something better. What's more, shopping for a new car before you need it gives you time to research the best car for your needs, secure the best financing available, and find the deal you're looking for.
6. Treat yourself to an experience
Arguably even more enjoyable than putting your refund toward a home improvement project is treating yourself to a special experience.
"Some people get back $5,000 and that's their vacation fund for the summer, instead of putting it on a credit card," Kalscheur says. "People who pre-pay their vacations, studies have shown, generally get more enjoyment out of them."
Whatever you ultimately choose to do with your tax refund this year, Kalscheur recommends thinking deeply about your options well ahead of time.
"Always have a game plan for what you're going to do with the money before you get it," Kalscheur says. "I'm a big proponent of having a goal for the refund way before it hits your bank account."
Mariah Summers is a Chase News contributor. She writes about finance, food and travel. Her work has appeared in the Financial Times and BuzzFeed.