12 Ways to Turn Your Tax Refund (Even a Modest One) Into a Big Financial Win

Due largely to the end of most COVID-related government relief programs, the average American’s tax refund was 9.3% smaller this year than the last. 

But even if you got a smaller tax refund than usual, you can use that money to grow your savings.

Keep reading for 12 key steps you can take to make sure your tax return goes as far as possible.

A high-yield savings account is one of the easiest ways to ensure your tax return’s value will increase. 

To generate interest with a savings account, you don’t have to research stocks, put together an investment portfolio, or figure out which type of Treasury bonds to buy. Just open an account, deposit your money, and sit back and watch your savings grow.

The exact interest rate you’ll get varies from bank to bank, so shop around. Some of the top high-yield savings accounts have interest rates of up to 5%.

A brokerage account is an investment account similar to an IRA, but unlike IRAs, brokerage accounts are taxed. While you can use them to grow a retirement nest egg, brokerage accounts don’t have withdrawal limits, penalties, or maximum contribution restrictions.

If you’ve already met your IRA or 401(k) contribution limit for the year but want to use your tax return to grow an investment, consider putting some extra money in your brokerage account instead.

While using your tax return to pay off your high-interest credit card debt isn’t an investment the same way putting it into an IRA or high-yield savings account would be, it’s definitely an investment in your future. 

Due to notoriously high interest rates, credit card debt can be absolutely debilitating — especially if you carry it into retirement.

An individual retirement account (IRA), is one essential cornerstone of a successful retirement strategy. 

Traditional IRA contributions aren’t taxed until you start withdrawing amounts in retirement, so contributing to an IRA account now could lower your overall taxable income and boost your tax savings.

You might be able to open an IRA at your bank, though you’ll probably have more options by working with a brokerage instead. A financial advisor can help you decide on the best investment strategy moving forward.

In contrast to a traditional IRA, contributions to Roth IRAs are taxed upfront instead of when they’re withdrawn. 

You can only contribute a certain amount of money to any IRA, Roth or otherwise. For 2023, that amount is $6,500 if you’re under 50 years old or $7,500 if you’re 50 or older. For 2024, the amount is $7,000 if you’re under 50 years old or $8,000 if you’re 50 or older.

While you can have both a Roth IRA and traditional IRA at the same time, your contribution limit remains the same: The limit is the total in IRA contributions, not per account.

Certificates of deposit (CDs) are somewhat comparable to savings accounts. But instead of putting any amount of cash into a bank account you can withdraw from at any time, a CD requires you to deposit a set amount of cash (for instance, a lump sum of $1,000).

You’re required to leave the money in your CD for a certain period of time and can’t make withdrawals (at least, not if you want to avoid incurring a fee). But as a result, CDs generally have higher interest rates than high-yield savings accounts.

If you have a retirement account like a 401(k) or 403(b) plan through your employer and you're not contributing the maximum amount, you can ask your employer to increase your monthly contributions up to the amount of your tax refund.

This means that a little bit extra will be taken out of your paycheck each month, but your tax refund will make up for it. This way, you can save more money for your retirement without having to make big changes to your budget.

As with IRAs, the government limits the amount of money you can contribute to a 401(k) each year. However, also as with an IRA, your 401(k) contribution limit increases once you turn 50.

Even if you’ve made the maximum amount of 401(k) contributions each year until now, you can still make catch-up contributions after age 50. 

Consider boosting the amount of money in your investment savings accounts as much as you can now that you’re closer to retirement. In 2023, you can contribute additional catch-up contributions for a total of $30,000, while in 2024, you can contribute up to $30,500.

While investing money in any type of interest-yielding account is a good idea for growing your retirement savings, avoiding debt can be just as important for securing a comfortable retirement.

If you’re trying to decide between investing money in a CD or paying a bill you couldn’t otherwise pay, focus on the bill first. Prioritize paying any bills that come with high interest rates or late payment fees attached, such as a credit card bill or payday loan payment.

A money market account (MMA) is another type of bank account that lets you earn interest on your deposits. 

With an MMA, you’ll typically secure a higher interest rate than you would with a checking or savings account, and you’ll be able to make more withdrawals from the account than you would with a CD.

However, there are still stricter requirements governing how much you can withdraw from a money market account compared to a typical bank account. 

If you can’t afford to tie up a lot of money in a CD but you want to earn more interest on your money than you would in a checking account, a money market account could be a good middle-of-the-road option.

Are you considering selling your current house and downsizing once you hit retirement? Your tax return can give you some extra pocket money to start making any essential repairs that will impact your home’s value.

Instead of working toward a major remodel, though, consider smaller projects with an attractive return on investment. For instance, you might want to focus on dealing with major issues that are likely to show up on a home inspection report.

Alternatively, making functional and cosmetic changes like fixing up the kitchen or bathrooms and updating the windows could give you a head start on turning your house into your future nest egg.

If you need your tax refund to pay bills or fund a necessary purchase, consider depositing it into an interest-bearing checking account. 

While checking accounts don’t have the same high interest rates as CDs, MMAs, or high-yield savings accounts, an interest-bearing checking account will still help your cash go a little further than it would have otherwise.

No matter how much (or how little) money you got back as your tax refund this year, deciding how to use it to grow your wealth can have major repercussions on your financial future.

While it’s tempting to use a lump-sum refund payment to treat yourself to something fun, make it a goal to put at least some (if not all) of that cash toward your retirement.