What Should I Do With My Tax Refund?

According to the IRS, 63% of Americans who filed a return received a tax refund in 2025, with an average amount of $3,167.¹ And when asked what they plan to do with the money, nearly half answered “savings.”²

If you’re asking yourself, “what should I do with my tax refund?” here are some tips to make the most of your payback from Uncle Sam.

What Should the Priority Be for My Tax Refund? Debt

Improving your financial situation should take priority if you’re getting a refund. And if you have high-interest debt, start there.

If you’re spending more on a loan or credit card interest than you’re receiving from your investments, you’d want to tackle the debt. And there are a couple of ways to do that—starting with your tax refund.

Using your tax refund to pay down the debt with the highest interest rate would be considered the “avalanche” method. And while this method makes sense mathematically, some people prefer—and are successful—using a “snowball” approach because of its psychological benefit.

The snowball approach is paying off the smallest debt first, regardless of interest rate. This method seems to make people feel better because they can see progress from paying off a smaller bill and it keeps them motivated.

What’s Next for My Tax Refund? Emergency Savings

A good next step for your tax refund may be to bolster your emergency fund. Keeping your money in a cash-equivalent investment, such as a money market fund, or in high-yield savings may be something clients want to consider, especially now.

Many financial pundits believe stocks are currently overvalued, so as far as investments go, investors should be more careful about purchases when prices are high. And especially if prices are too high.

It may be smart to build your cash reserves now, especially if you need more in your emergency fund. The last thing investors may want to do is lock it up in other kinds of accounts, such as an IRA, which could mean penalties if you need to withdraw the money before age 59½.

Another reason for cash reserves? Dry powder, which is cash or securities you can convert to cash, that has a two-fold purpose. In addition to having lower-risk accounts that give you easier access to the money for an emergency, dry powder can be for investing in opportunities that spring up—such as if equities experience a downturn and you can purchase them at a lower cost.

What Else Can I Do With My Tax Refund? Invest in the Future

If you’re in a good place with debt and your emergency fund is well funded, the next step may be to look to the future with your tax refund. That could mean investing for someone else or yourself.

Consider a Child's Future

You can use your tax refund to invest in an education or custodial account for the next generation. You can open a new account or add your refund amount to one that has already been established.

Money invested in a 529 savings plan or Coverdell Education Savings Account (CESA) must be used for education expenses. A Uniform Transfers to Minors Act (UTMA) account can be used for any purpose—including education.

And while IRAs are generally used for retirement, you can also use them for other IRS-specified purposes . Any adult can open an IRA for a minor if the child has earned income, but it's important to understand funding and withdrawal rules before establishing an account.

Help a Child With a Down Payment

Wanting to help your family with your tax refund? One avenue may be gifting them a down payment for their own home. As home prices continue to rise, more and more parents are helping their children with a down payment. According to one survey, nearly a quarter of Gen Zers and millennials expected to receive help funding an upcoming house purchase.⁴

If you’re planning to help out a family member with a down payment gift, there are rules you need to know about, so be sure you understand how much you can give without impacting your own financial situation.

Plan for Retirement

While debt payoff and an emergency fund are good choices for a tax refund, investing in your future is also important.

It never hurts to grow your nest egg with a lump sum investment, but it also doesn’t have to be in an IRA. You could consider a taxable account too.

Investors may want to think about which year they will contribute to for an IRA. You can contribute for the previous year until the next year's tax filing deadline. If you’re receiving your refund and want to contribute for last year, you will have to refile.

Additionally, you could use your refund to increase contributions to your workplace retirement plan, such as a 401(k), if you haven’t already maxed out those contributions for the year.

Should I Rethink Receiving a Tax Refund? Maybe

A tax refund is issued because you paid too much in taxes during the previous year, and while the IRS holds that money, they will not pay you interest on the amount you overpaid.

As a result, some people may be trading their investment opportunities for a lump-sum reimbursement from the IRS. If you are earmarking a tax refund for a vacation or to pay off debt, there may be a better option, such as a high-yield savings account that pays interest.

If you reduce your tax withholding, you could use that money to make your own potential interest or returns. Then you can pay down debt or build up your emergency fund with the money plus potential earnings on it. Of course, many people don’t want to “owe” the IRS at the end of the year—they’d rather overpay.