5 Smart Ways to Spend Your Tax Refund

Instead of blowing through the money, consider bulking up your emergency fund or targeting high-interest credit card debt

Richard Eisenberg,

AARP

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Published March 21, 2025

money in the shape of an arrow pointing at different things to spend it on

Photo Collage: AARP; (Source: IRS; Getty Images (4))

Odds are, there’s a 2024 tax refund coming your way or you’ve already received one. In a recent Taxslayer survey, nearly 4 out of 5 taxpayers said they believed they’d be getting money back from the IRS this year.

“The income tax refund, for many people, ends up being the largest single cash windfall that they get during the course of a year,” says Mark Hamrick, senior economic analyst at Bankrate. Last year, the average federal income tax refund was $3,382.

The IRS’s automated Where’s My Refund? tool lets you track the status of your federal tax refund. But what’s the best way to use the money?

“Every person’s situation is really going to differ. It comes down to your goals and personal financial situation,” says Jeff George, founder and principal of the Tao Financial wealth management firm in Orlando, Florida.

Need a little direction? Here are five expert-recommended ways to consider spending your refund.

1. Boost your emergency savings

If you don’t already have an emergency fund to cover three to six months’ worth of living expenses, you’re not alone. Witness: 14 percent of Gen Xers (ages 45–60) and 10 percent of boomers (ages 61–79) have no emergency savings, according to Bankrate’s 2025 emergency savings report. Moreover, a recent AARP research report, “Preparing for the Unexpected: Understanding Emergency Savings and Why It Is Critical to Financial Well-Being,” found that just half of U.S. households have set aside enough money to cover expenses for three months, and fewer than 3 in 4 households could come up with $2,000 if an unexpected need arose.

Your tax refund can help you build or bulk up a rainy-day fund for unexpected costs like an emergency car or home repair or a big medical bill. “The less you have in savings, the more you have to rely on debt in an emergency,” says Lazetta Rainey Braxton, a certified financial planner and founder and managing principal of The Real Wealth Coterie advisory firm in New York City.

Want to put your federal tax refund directly into a bank account that you’ve designated for emergency savings so that you’re not tempted to spend the money? The IRS allows you to elect to receive your refund via direct deposit and split it into as many as three accounts.

For low-risk returns, consider putting the money in a high-yield savings account at a federally insured bank. In mid-March, high-yield online savings accounts were offering interest rates as high as 4.5 percent, according to Bankrate.

2. Pay off credit card debt

About 1 in 3 Americans plan to use their 2024 tax refund to pay down debt, according to the National Retail Federation's 2025 tax returns survey of 8,568 U.S. adults.

On average, boomers have $6,043 in credit card debt and Gen Xers are saddled with $7,155, according to credit bureau Experian. In addition, the Employee Benefit Research Institute reports most retirees have debt, and 68 percent of those with debt are carrying a credit card balance, up from 40 percent in 2022.

The average credit card interest rate has topped 20 percent since 2023, and some cards currently charge rates of over 30 percent. Depending on your card’s interest rate and how much you owe, using your tax refund to chip away at credit card balances could save you a lot of money in interest.

“When I talk with my clients doing serious retirement planning starting at age 50, I encourage them to clear the slate of credit card debt as much as possible to give them the freedom in the future to do other things,” says Braxton.

3. Help fund a home renovation

If you’re hoping to sell your home soon to downsize or just relocate, your tax refund could go toward the cost of remodeling.

Bear in mind that most renovation projects won’t increase a home’s resale value by more than their average cost, according to Zonda’s 2024 Cost vs. Value Report. “I would argue that home renovations are somewhat similar to buying a non-collectible car — you’ll be able to recover a portion of what you paid, but you’ll be unlikely to get back the full amount,” says George.

But a few renovations that boost curb appeal could provide strong returns, the Zonda study found.

A garage door replacement costs $4,513, on average, and increases a home’s resale value by more than $4,000 on average. Replacing a traditional front door with a steel one costs $2,355 on average but recoups 188 percent on average.

Curb-appeal fixes could also “help to attract buyers and get a house sold faster,” George says. That may explain why more than 9 out of 10 real estate agents suggest sellers improve their home’s curb appeal before listing their property for sale, a recent National Association of Realtors survey found.

4. Nourish your nest egg

Of course, you could use your tax refund to help pave the way toward a more financially secure retirement by growing your nest egg.

If you have a 401(k) or 403(b) plan, the maximum contribution in 2025 is $31,000 if you’re 50 or older (that includes a $7,500 catch-up contribution above the standard $23,500 limit for younger people). The SECURE 2.0 Act allows for a “super catch-up” contribution amount of $11,250 for people ages 60 through 63 who participate in these plans.

Alternatively, if you have earned income from employment, you could put your tax refund in an individual retirement account (IRA) and potentially deduct the contribution, depending on your income and whether you have a retirement plan through your employer. The maximum contribution for people 50 or older for tax years 2024 and 2025 is $8,000.

5. Help a grandchild save for college

You might consider investing your tax refund in a grandchild’s higher education. An annual gift tax exemption allows you to give up to a certain amount each year to as many people as you’d like, tax-free. The exemption limit for the 2025 tax year is $19,000 per recipient.

One way to help fund a grandchild’s college tuition is to put the money in a 529 college savings plan. You can direct your contributions to one of the plan’s investment portfolios and benefit from the appreciation of the assets over time. Plus, the money you contribute grows tax-free, and withdrawals for qualified educational expenses are also tax-free.

A potential bonus: More than 30 states offer a tax deduction or credit for 529 contributions for people. In most cases, you must live in the state offering the plan to qualify for the tax breaks, but nine states (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania) offer residents a tax deduction for contributions to any 529 plans.

Some states allow you to write off the entire amount you put in and some have limits.

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