This story is part of Taxes 2023, CNET’s coverage of the best tax software, tax tips and everything else you need to file your return and track your refund.
If you’ve already filed your taxes, your refund should be on its way to you. The IRS has already processed nearly 50 million tax returns this year, and if you’re owed a return, the IRS is anticipating you’ll receive your refund within three weeks — if you’re receiving it through direct deposit.
The average refund clocks in at around $2,972 to date, an amount that can help you reach financial goals faster. With prices continuing to rise, particularly the cost of food and housing, your refund could help you stretch your dollar a little bit further. You should use your refund to catch up on any past-due bills or to take care of the costs of everyday essentials. But if you don’t have immediate needs for this money, there are some additional smart ways to use it to help improve your financial health.
Whether you’re waiting for your tax refund or it’s sitting untouched in your bank account, here are six ways to put your tax refund to work for you.
1. Pay down high-interest debt
The Fed has already raised rates once this year, on top of the seven increases we saw last year. Each rate increase makes it more expensive to carry a balance on your credit card — and right now credit cards are averaging annual percentage rates upwards of 20%.
Credit cards tend to be the debt with the highest interest rates — though this isn’t always the case. Paying down the debt with the highest interest rate first (aka the avalanche method) can help you save money down the road in interest charges. If you have multiple credit cards with similar APRs carrying debt, you could also opt to pay down the smallest balances first (the snowball method) so you have fewer remaining credit cards to worry about paying off.
2. Build or boost your emergency fund
An emergency fund is an important financial tool that can help you in the event of a job loss, salary decrease or unexpected financial emergency (like a hefty medical bill). Your emergency fund should ideally contain three to six months’ worth of expenses, which is the amount you spend on things like rent, utilities, groceries, gas and other essentials.
Your tax refund can help you get started on building an emergency fund. A high-yield savings account that earns slightly higher interest rates that you can access quickly is a great place to store this money. Many online banks like Capital One, Ally and Marcus offer high-yield savings options. You might also consider investing in a short-term certificate of deposit, to potentially lock in a higher-yield, if you feel comfortable not having access to your money during the CD term.
You can work on this goal in tandem to paying down high-interest debt. Even a few hundred dollars stored away can help if an unexpected expense pops up.
3. Pay your future self
While it may not be the most glamorous way to enjoy your money now, investing in your future is important at any stage of your career. You can use your tax refund to contribute to any retirement plans you have, 401(k)s or IRAs. In 2023, you can contribute up to $22,500 to a 401(k) and $6,500 for traditional and Roth IRAs. (If you’re over 50, you can contribute an extra $7,500 to your 401(k) and $1,000 to an IRA.)
If you can’t max out your workplace retirement plan, try to invest enough to earn your employer’s full match. Or, if you can, focus on contributing more than you did the year before to set up good investing habits.
Lastly, you could consider investing your refund in the market. There’s no one way to begin investing; it will look different for everyone. If you’d like to invest with minimal risk, purchasing an ETF, or exchange-traded fund, or index fund might make sense. Both options spread out your risk across different stocks and bonds that track a particular index, like the S&P 500. You won’t get rich overnight with index funds or ETFs. They’re more of a long-term play.
If you want to take a more active role in investing and don’t mind taking on higher risk, you could invest directly into the stock market through a brokerage. A few online options for investing in ETFs, index funds and stocks include TD Ameritrade, E Trade and Fidelity Investments.
For those who don’t want to be as active in the investing process, a robo-advisor might make sense. Robo-advisors like Betterment, Wealthfront and Ellevest use AI to create a portfolio based on your financial needs and goals.
4. Contribute to your HSA or FSA
A health savings account is a savings plan specifically designed for health-related costs. HSAs are a type of investment account, even though they’re called “savings” plans. If you have a high-deductible health plan, you’re eligible to open an HSA. HSAs are triple tax-free: Your contributions, earnings and withdrawals aren’t taxed. Your employer may also offer access to an FSA, flexible spending account, which is also a tax-free account for qualifying medical expenses.
If you have a health savings account or flexible savings account, you might want to use some of your tax return to fund it. The contribution limits for 2023 for an HSA are $3,850 for an individual and $7,750 for family plans. The FSA contributions limit for 2023 is $3,050.
5. Save for college
Whether it’s for a child or yourself, you can put your refund to work by investing it for future college expenses. You have different options for storing this money, including a high-yield savings account, an investment account or a 529 plan.
A 529 plan is specifically made for college savings, but it acts more like an investment account. Earnings grow tax-free and as long as you use the funds for education-related costs, you’re not on the hook to pay taxes on your withdrawals.
Starting in 2024, you’ll be able to roll over funds in 529 plans to Roth IRAs, if you don’t spend the money on education.
6. Invest in your goals and experiences
While college is a great self-investment, there are other ways you can use your tax refund for a good cause. If you’ve been contemplating a career change or side hustle, use your money to invest in that switch. If you need capital to start your own business, this could be your chance. Or use your funds to invest in classes, courses or certifications that will help take your skills to the next level.
And don’t overlook the importance of mental health. If you’ve yet to take a vacation during the pandemic or are overdue for a trip, you could put a portion of your funds towards a much-needed vacation. With travel costs continuing to rise, your refund could help you better afford a weekend away.