The average 2025 tax refund totaled about $3,000, per the IRS, and the vast majority of people who expected refunds planned to save at least some of the money. But for 58%, that meant depositing the refunds into standard checking or savings accounts, or holding it as cash, according to a recent survey by Santander Bank, N.A. While parking the money beats reckless spending, it’s usually not the best use for your tax return.
“Choosing to do nothing can feel safer than making a financial decision, but it’s still a decision,” said Elisabella Ricca, personal finance and consumer analyst at TopCashback. “The key is to take small, intentional steps so your money works toward your future goals.”
Read:Can caring for my aging parents help my tax bill?
5 Strategic Ways To Use Your Tax Refund in 2026
When thinking about the best ways to use your refund, Ricca recommended prioritizing potential uses by urgency and impact. Here’s a look at strategies that can accomplish both.
Build an Emergency Fund
Working adults know it’s a good idea to have enough savings to cover several months of expenses in case you lose your job. Retirees don’t have to worry about that, but Ricca said they do still need savings for unexpected expenses. Keep the money in a high-yield savings or money market account to maximize interest earnings.
Pay Down Debt
With average credit card rates topping 21%, paying down high-interest debt has obvious benefits. But for people with “good” debt like a mortgage or car loan, putting windfall money toward large principal can also be tempting.
“Mathematically, keeping low-interest debt and investing the extra cash may offer a higher return. But for many people, the peace of mind and flexibility that come from reducing monthly payments can be just as valuable,” according to Ricca.
Max Out 401(k) Contributions
Fewer than 30% of workers ages 45 and older max out their 401(k) contributions, per a Vanguard analysis. That means you could be leaving a small fortune in tax savings and compound growth on the table. Contributions come from payroll withdrawals, but Ricca suggested using the refund as a cushion while you increase your deferral percentage.
Reserve Funds for Healthcare
A high-yield account reserved specifically for a healthcare “sinking fund” – for insurance premiums, deductibles and co-pays, prescriptions, dental and vision care and other healthcare expenses – will help to ensure that you never have to do without care because of the cost.
“If someone is eligible for a health savings account (HSA), it can be especially valuable because they offer triple tax advantages: tax-deductible contributions, tax-free growth and tax-free withdrawals,” Ricca said.
“Mathematically, keeping low-interest debt and investing the extra cash may offer a higher return. But for many people, the peace of mind and flexibility that come from reducing monthly payments can be just as valuable.”
Prepare Your Home for the Future
A recent Pew Research Center survey found that most older adults want to age in place, but only 37% think that’s extremely or very likely to happen. Using your tax refund to modify your home can increase the chance that it will.
“This extra cash can cover smaller upgrades or be put toward large projects such as walk-in showers or stairlifts,” Ricca said. “Putting these systems in place early can give more peace of mind as you age, and can help make your home more livable before there’s an urgent need.”
The Best Refund Strategy Is To Avoid Refunds
Some people look at tax refunds as a bonus, so in their minds, bigger is better. In reality, a refund means you overpaid tax during the year, “giving the government an interest-free loan,” as Ricca termed it.
A better approach is to make the money work for you, not the government. For example, an extra $250 monthly ($3,000 annually) 401(k) investment earns you about $100 after a year at a modest 6% return. Keep it up for five years and your gains jump to over $2,500.
This article written for TheStreet by Nifty 50+