Got a tax refund? 5 smart ways to use the money to boost your finances this year

Many people in the United States may get bigger tax refunds this year, and experts say using the money wisely can help improve personal finances. Last year, the average tax refund was $3,052, according to an analysis by the Tax Foundation. This year, the average refund could rise to about $3,800 because of new and expanded tax breaks from a law called the “One Big, Beautiful Bill”, as stated by Investopedia. Experts say this extra money could help people save more, reduce debt, or grow their investments if they plan carefully. Financial experts shared five smart ways people can use their tax refund to strengthen their finances this year.

Put the money into a certificate of deposit (CD)

One option is to place the tax refund into a Certificate of Deposit (CD) to help the money grow safely. A CD lets you lock your money for a fixed time period and earn a guaranteed interest rate, also called the annual percentage yield (APY), as noted by Investopedia. This makes CDs different from many regular savings accounts, where the interest rate can change anytime. Because the money is locked in, it can also help people avoid spending the refund on everyday purchases.

However, there is a downside—taking money out before the time period ends usually leads to an early withdrawal penalty. That means the money may be harder to access during emergencies compared with other savings accounts.

Put it in a high-yield savings or money market account

Another option is to put the tax refund in a high-yield savings account or a money market account. These accounts allow people to withdraw or move money without penalties, unlike CDs. According to an Investopedia analysis, some of the best high-yield savings accounts offer about 5% APY, as cited by Investopedia.

The best money market accounts offer around 4% APY, which is also higher than many traditional savings accounts. Many high-yield savings accounts are offered by online banks or the online divisions of traditional banks. These online accounts often provide better interest rates than standard savings accounts. Money market accounts are usually available through banks and credit unions. These accounts often require a higher starting deposit, usually about $1,000, and a minimum balance to avoid fees.

Put the money into a 529 college savings plan

People who want to save money for a child’s education can use their tax refund to invest in a 529 college savings plan. These plans are run by U.S. states and Washington, D.C. Parents or grandparents usually open these plans to save money for a child’s future college expenses. The money in a 529 plan is invested in things like mutual funds or exchange-traded funds (ETFs). Over time, these investments usually earn returns of about 5% to 8%.

In some states, putting money into a 529 plan can also lower state taxes. When the child later uses the money for qualified education expenses, the withdrawals are tax-free. However, if the money is used for non-education purposes, the person may have to pay income tax and usually a 10% federal penalty, according to Investopedia. Recent rule changes also made these accounts more flexible for families.

Families can now convert up to $35,000 from a 529 plan into a Roth IRA for the child if the education money is not fully used. Starting in 2025, the list of qualified education expenses also expanded to include books, tutoring, dual-enrollment classes, and standardized tests for K-12 students.

Add the refund to retirement savings

Experts say people can also use their tax refund to increase their retirement savings. In 2025, many Americans said they felt less confident about their retirement plans compared with the previous year. Even though people contributed more to retirement accounts, many also withdrew money for emergencies. Because of this uncertainty, larger tax refunds could help people rebuild their retirement savings.

One option is a Roth Individual Retirement Account (Roth IRA). In a Roth IRA, the money you put in is not tax-deductible. But when you take the money out after retirement, you do not have to pay tax on it. This account is often good for younger workers who think they will earn more money and pay higher taxes in the future.

Another option is a Traditional IRA, according to Investopedia. In a Traditional IRA, the money you put in may reduce your taxes now. But when you take the money out after retirement, you must pay tax on it as income. Many people choose this option because they think they will earn less money and pay lower taxes after they retire.

Workers can also save for retirement through a 401(k) plan from their employer. In many jobs, the employer adds extra money to match part of what the worker saves. This helps the worker grow their retirement savings faster.

Use the money to pay off credit card debt

Another smart way to use a tax refund is to pay down credit card debt. In the last quarter of 2025, total credit card balances in the U.S. rose by $44 billion. This pushed the total credit card debt to about $1.28 trillion. The total balance was 5.5% higher than the previous year. Because of rising debt and late payments, more than one-third of Americans plan to use their tax refund to pay off debt this year, as per Investopedia.

Missing a credit card payment can hurt a person’s credit score. This can make it harder to get loans in the future. Credit cards usually have the highest interest rates compared to other common types of debt. The average credit card APR is about 25%. For example, if a person has a $3,000 credit card balance, they could pay about $750 in interest in one year if they do not pay the debt. But if the person gets a $3,000 tax refund and uses it to pay off the credit card balance right away, they can avoid paying that $750 interest. The $750 saved can then be used for other important things like buying groceries, saving money, or paying a mortgage.

FAQs

Q1. What are some smart ways to use a tax refund?

You can use a tax refund to save money in a CD or high-yield savings account, invest in retirement or education plans, or pay off credit card debt.

Q2. Is it better to save a tax refund or pay debt first?

Many experts say paying high-interest credit card debt first is smart because it saves money on interest and improves your credit score.