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A tax refund can be a real chunk of change that feels like an exciting windfall of “free” money.

Some people feel relieved to pay off their credit card balance. Or pumped to put it straight into the stash they’ve been building for a down payment on a house. Others may be looking forward to treating themselves (hello, new microfoaming espresso machine.)

But within the big picture of saving and investing, getting a refund may not be the ideal result. Technically, it means you’ve paid more tax than you needed to during the year, in effect making an interest-free loan to the government. If you’d been able to keep more of your paycheck at the start, you might have had a financial advantage, paying high-interest debt down faster or adding to your 401(k) investments earlier.

On the other hand, refunds are a form of forced savings that may not come naturally otherwise.

Here’s what to consider.

Why You Get a Refund

Income taxes are typically pay-as-you-go, so unless you’re self-employed, you’re typically taxed throughout the year, with part of each paycheck going directly to the IRS to fund government functions like national defense, roads and bridges, and safety net programs.

(Self-employed people don’t have taxes withheld from their paycheck, but the same concept applies because they have to make quarterly tax payments based on their estimates of earnings.)

How much is diverted is determined by how you fill out the IRS’s W-4 withholding form, which takes into account your tax filing status, family, other income, and tax credits or deductions.

The idea is that if the right amount is withheld, come tax time, you won’t owe the IRS anything more, but the IRS won’t need to return anything to you either.

Taxes are complicated, though. If you don’t keep your W-4 up-to-date, you don’t fill it out correctly, or there are retroactive changes to tax law (as there were this year,) you may not break even. You could wind up with a refund or tax bill. (If you owe money, missing the mark too much can result in an extra penalty too.)

The Downsides of Getting a Tax Refund

While there were unusual circumstances to this year’s refunds, here’s why you may not want one in the future.

If you get a $3,000 refund, that effectively means your paychecks were about $250 a month lower than they needed to be.

Here’s what might have happened if you’d had access to that money a year earlier.

Let’s say you had $5,000 in credit card debt accruing finance charges at a 15% annual interest rate. If you paid $350 a month instead of $100 a month, you’d have saved $215 in interest after one year.

Or, let’s say you added the $250 to your monthly 401(k) contribution, giving it an extra year to grow. (If that money earned a 7% annual return — the average return for the S&P 500 Index historically — you’d have earned an extra $113.)

The Benefits of Getting a Tax Refund

So why do so many people wind up effectively lending the government money?

While it’s often the result of errors or changed circumstances, there’s a psychological component to getting a refund too: Getting the money all at once feels different than getting it throughout the year.

Depending on how disciplined you are, this may or may not be a good thing. For instance, a 2024 survey by Intuit Credit Karma showed that about a quarter of taxpayers planned to use their refund for things they wouldn’t otherwise buy. This aligns with academic research that has shown households tend to increase their spending when they receive expected refunds.

On the other hand, an Experian survey last month revealed a third of consumers planned to add it to savings, 20% were going to use the money to pay down debt, 10% were going to invest it, and 8% were going to use it for home improvement.

Whatever You Do, Make It Count

If you get your tax withholding right on the nose, you can make more of your money work for you sooner.

But if saving money is a monthly struggle, it may be worth it to overwithhold and let the government safeguard cash in a lump sum.

Ultimately, if you get a tax refund — for whatever the reason — make it count. Use it to make progress on a financial goal, like paying down debt, giving yourself more financial cushion, or building up your retirement savings. Your future self will thank you.

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