4 Smart Ways to Use Your Tax Refund (That’ll Boost Your Bottom Line)



The IRS expects to process more than 153 million tax returns by April 18th, with more than 70% of those returns getting refunds. The average refund issued last year was $2,860. If you filed early, your refund may already be tempting you to spurge. Before you do that, consider these ideas that can improve your financial health.

1. Pay Down Debt

According to a Bankrate survey, 24% of tax refund recipients plan to use the money to pay down credit cards or student loan debt. This can make a big impact on your credit score and your peace of mind.

Start with credit card debt. Today, the U.S. households that carry credit card debt average a balance over $16,000. The average variable credit card APR is over 16%. If you only pay the minimum each month, at that rate you could spend thousands on interest before paying off the balance – even if you don’t buy anything new. If you apply a $3,000 tax refund to that balance, you’d cut the total interest cost significantly—even if you make only minimum payments after that.

Serious about cutting high-interest debt? See if you can refinance the remaining balance with a low interest rate personal loan. Not only can slashing the rate save you money, but spreading out the payments can make your life less stressful.

Using your tax refund to pay down student loans can also be a smart move. A few thousand dollars might not feel like much, but every dollar you pay over the minimum helps reduce your total interest cost. Thanks to the Higher Education Opportunity Act,  all education loans, including federal and private student loans, allow penalty-free prepayment – which means you can pay more than the monthly minimum without a fee. Just be sure your servicer applies the extra cash to the principal instead of earmarking for future payments, as some do.  

2. Start Investing

The largest group of respondents to the Bankrate survey—39%—said they plan to save or invest their refund. (Psst—SoFi Wealth can help you get started with that.) Even if you have debt to pay down, consider investing some of your refund for your future, because ultimately you’ll need to do both.

SoFi recommends keeping an emergency fund to cover at least three months’ expenses. According to a recent survey, 56% of Americans claimed to have less than $1,000 in their savings and checking accounts combined. Using your tax refund to build an emergency fund is a relatively painless way to get started.

You can also use your refund to pad your IRA or other tax-advantaged retirement account. Let’s say you invest a $3,000 refund in a tax-deferred account each year for the next 10 years. If your account makes a 7% average annual return (the inflation-adjusted average return on the S&P from 1928-2014), after 10 years you’d have over $40,000. Note that there’s no guarantee the next 10 years will be average.The actual return would vary from year-to-year and could lose money. A less risky investment than 100% stocks would probably earn less, but the point still holds that it’s smart to get started investing for retirement.

If your employer matches your 401(k) contributions, be sure to contribute enough to get the full match. You generally can’t deposit a refund directly into a 401(k), but you can increase your payroll contribution to the plan and use your refund to make up the income difference.

In a traditional retirement account, you deduct your contribution and the returns are not taxed until you withdraw them. In a Roth IRA or 401(k), you can’t deduct the contribution, but you pay no tax on the withdrawals after retirement. The rules can be tricky, but SoFi advisors and our IRA calculator can help you choose which type of IRA is best for you. If you choose a traditional (deductible) IRA or 401(k) contribution, it will also reduce your 2017 taxable income and might get you a bigger refund next year.

3. Spend Strategically

Sometimes it’s smart to spend your money. If you’re debt-free and your savings and investments are on track, it could make sense to invest in your home or your career.

This may be a good time to start a home improvement project you’ve been putting off. Not all improvements pay for themselves, but Consumer Reports lists 8 projects that increased the value of homes from 1 to 7 percent in 2016. They range from painting to a full kitchen remodel. Bigger projects might need some additional financing from a personal loan or line of credit, but your refund can reduce the amount you borrow.

It’s also important to invest in your career. Since 2008, thousands of workers have actually left the job market. Many stopped looking for a job because their skills were obsolete. Constantly improving your skills with continuing education and certificate programs, or even exploring a whole new field, can keep your career on track in an ever-changing world. Who knows – by next April you might have a better job.

4. Withhold Less

Getting money back from Uncle Sam might feel like a windfall, but it’s really an interest-free loan to the government. It’s money you could be saving, investing, or using to pay down debt. Work with a tax professional to adjust your withholding or estimated tax payments to be sure you keep your money working for you—without underpaying this year’s taxes.

This article is intended to provide useful information about personal finance, but it is not intended to provide legal, investment or tax advice.

Disclaimer: This information is intended to serve for educational purposes only and should not be considered a substitute for personalized investment, planning, tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.

The SoFi Wealth platform is operated and maintained by SoFi Wealth LLC, an SEC Registered Investment Advisor. Brokerage services are provided to clients of SoFi Wealth LLC by SoFi Securities LLC, an affiliated broker-dealer registered with the Securities and Exchange Commission and a member of FINRA/SIPC. Investments are not FDIC Insured, have No Guarantee and May Lose Value. Past performance, historical returns, future projections, and statistical forecasts are no guarantee of future returns or future performance.  Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Clearing and custody of all securities are provided by APEX Clearing Corporation.

Editor’s Note: This is an updated version of a post we originally published in April 2015. We welcome new comments and questions below.


ABOUT Dan Macklin Twitter: @macklindan Dan Macklin is a co-founder of SoFi and VP of Community & Member Success with responsibility for maximizing the overall experience for SoFi’s growing community of members. Dan holds an M.S., Management degree from the Stanford Graduate School of Business where he was a Sloan Fellow. He also holds a B.A. in Business Economics from University of Durham in England.


2 thoughts on “4 Smart Ways to Use Your Tax Refund (That’ll Boost Your Bottom Line)

  1. Walter Hall says:

    I Did won anything pch

  2. Sameer Patel says:

    A better idea would be to change your withholding amounts on your W-4 such that you aren’t “lending” the government ~$3K(annuity) over a period of 14 months(and that’s if you’re proactive about filing). Use that semi-monthly increase of $125 (3K/24) on take-home-pay to reduce your debt from January through December of the current year, rather than April of the next year, whilst you accrue interest. Assuming a friendly 7% loan, you could pay down an additional ~$150 on top of the $3000 each year. It may not be much in terms of interest saved, but its effortless, and who doesn’t want to get out of debt earlier and improve their credit. And now consider this effect if you have a higher refund, with perhaps a longer term and/or higher rate loan. If you’re choosing option one for a use of that money, it’s never going to be in your hands anyways, so why pay interest on behalf of the IRS?

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