Smart Things to Do With a Tax Refund
Derek Hatfield/shutterstock

12 Smart Financial Moves to Make With Your Tax Refund

View Slideshow
Smart Things to Do With a Tax Refund
Derek Hatfield/shutterstock

REFUNDAMENTALS

The average tax refund this year, as of mid-March, is $2,957, according to the Internal Revenue Service — a sizable sum to get all at once. Deciding what to do with such a windfall can be daunting. In a 2016 survey by Capital One, 65 percent of respondents said they think it's best to use a tax refund in a practical way. But what is "practical" may depend on the situation. Respondents were evenly split on the question of saving vs. spending the money. Either way, there are many financially sound approaches to making the most of a tax refund.

Related: Tax Credits and Deductions That Could Save You Thousands

Pay Down High-Interest Debt First
hin255/shutterstock

PAY DOWN HIGH-INTEREST DEBT FIRST

One of the best investments is paying down high-interest debt. For example, the average annual percentage rate for credit card interest is about 16 percent, so paying down credit card debt is essentially like getting a risk-free 16 percent return on an investment.

Related: 12 Best Credit Cards for Seniors

Top Off A 'Rainy Day' Fund
Rostislav_Sedlacek/istockphoto

TOP OFF A 'RAINY DAY' FUND

Having money set aside in case of an injury, car accident, or job loss helps keep everyday emergencies from turning into financial emergencies. Many financial advisers recommend socking away at least three to six months' worth of expenses in an easily accessible savings or high-yield checking account. A tax refund can help build this emergency fund.

Max Out 401(K) Matching
mj007/shutterstock

MAX OUT 401(K) MATCHING

Some companies match a portion of a worker's contribution to an employer-sponsored retirement plan such as a 401(k). Employees who do not already contribute enough to get the maximum employer portion could consider contributing more. The rules do not allow lump-sum investments into a 401(k) — the contribution must be deducted from a paycheck — so use the tax refund money to make up the difference in take-home pay after increasing the amount withheld from a paycheck.

Max Out 401(K) Contributions
designer491/shutterstock
Invest With an IRA
Don Mammoser/shutterstock

INVEST WITH AN IRA

People without high-interest debt who already get the maximum allowed match from employer-sponsored retirement plans could use their tax refund money to establish or contribute to an Individual Retirement Arrangement. An IRA offers tax advantages and greater flexibility with investment options than a 401(k) plan. A traditional IRA lets account holders defer paying taxes on the money they contribute (in practice, that means taking a tax deduction equal to the amount put in the account) until money is withdrawn. With a Roth IRA, income taxes are paid on the contributions, but the principal and earnings can be withdrawn later tax-free.

Related: This Last-Minute Move Could Lower Your Taxes

Save for Short-Term Goals
topseller/shutterstock

SAVE FOR SHORT-TERM GOALS

Saving for retirement usually means looking decades ahead. For short-term goals such as buying a car or house, getting married, growing a family, or continuing education in the next few years, put some money into low-risk investments. They won't earn a high return, but the money will be there when it's needed.

Pay Down Low-Interest Debt
designer491/istockphoto

PAY DOWN LOW-INTEREST DEBT

Debt is not inherently bad, and in some cases it may make more sense to invest than to pay off debts early. For instance, if an investment offers an expected return of 5 percent and the interest on a loan is 3 percent, investing represents a net gain. But there is more risk involved, and some people may feel more secure without any debt than they would with the potential for a small return on their money.

Create An Opportunity Fund
Filipovic018/istockphoto

CREATE AN OPPORTUNITY FUND

Unlike an emergency fund, an opportunity fund allows for timely purchases without worry — such as buying a TV or computer when it goes on sale for a short time. This could also mean having the "opportunity" to donate when a friend or family member needs financial help.

Make Small Purchases That Pay for Themselves
Tomislav Pinter/shutterstock

MAKE SMALL PURCHASES THAT PAY FOR THEMSELVES

For taxpayers with a little money left over from a refund, investing in physical products may make just as much financial sense as investing in financial products. Consider buying things that pay for themselves over time by cutting other expenses. Some ideas include LED light bulbs, rechargeable batteries, or a water filter in lieu of bottled water.

529 Plans Expand
designer491/istockphoto

START A 529 PLAN

Folks looking to help finance a child's education can also get a tax break for themselves with 529 savings plans. Under old laws, a tax-advantaged 529 plan could be used only at eligible colleges and universities. Those plans can now cover $10,000 per year of qualifying expenses for any school and any grade from kindergarten through high school — public, private, and religious institutions included. Using a tax refund would be an easy way to start such a plan.

Time Necessary Purchases With Sales
Yuriy Rudyy/shutterstock

TIME NECESSARY PURCHASES WITH SALES

The money for a major purchase may be in the bank now, but this isn't necessarily the best time to buy. In April, cars and home improvement supplies typically are discounted. For other big-ticket items, it may be best to wait for a deal.

Save For What You Really Want
BMProductions/shutterstock

SAVE FOR WHAT YOU REALLY WANT

Saving is not always fun, but it can buy something fun. If the practical things such as debts, emergency fund, short-term goals, and retirement accounts are covered, designate the windfall for something more exciting, such as a big vacation.