5 Smart Things to Do With Your Tax Refund

According to IRS data, around three-quarters of American taxpayers receive a refund each year. In 2024, the average tax return was approximately $2,850—and this year, the average refund check could be even higher. That’s because tax brackets have increased to match inflation, which means more income now falls into lower brackets.

Since there’s a good chance you’ll be getting something back from Uncle Sam this year, you should have a plan for the best way to use that money. Your Northwestern Mutual financial advisor can help you determine the best way to save and grow your money based on your goals and timeline. Below, we highlight five smart ways you can use your tax refund to set yourself up for a financially sound 2025.

What to do with your tax refund

1. Tackle any high-interest debt

Carrying high-interest debt can make it more difficult for you to achieve your financial goals, especially in today’s current high rate environment.

If you have high-interest debt, such as a balance on your credit cards, you might consider using your tax refund to pay it down. By reducing or eliminating the amount you pay in interest each month, you’re freeing up future cash in your budget.

Let’s say you have a $2,750 balance on a credit card charging a 22.95 percent annual percentage rate, which is the current average. If you only make the minimum payment of $78, it’d take you almost five years to pay off the debt and it would cost you more than $1,700 in interest.

But if you use your tax refund to pay the balance off all at once, you can avoid those interest charges—and free up an extra $78 in your budget each month. Putting just a few hundred dollars of your refund toward your balance can lead to big savings in both time and interest charges.

2. Save for a goal

Receiving a tax refund can be a great way to start saving for a bigger goal. For instance, maybe you've been itching to take a trip abroad, or have been thinking about upgrading from your starter home to your dream home. Or maybe you need to start building or boost your emergency fund so you’re prepared for any unexpected expenses. Whatever the goal, the first step is to set aside some money for it.

If you’re saving for emergencies or a short-term goal, meaning something you want to accomplish within a few months or years, consider putting your goal money into a high-yield savings account. This way, the money will be easy to access whenever you need it, and it can still earn interest. Likewise, consider making it separate from the bank where you hold your primary checking account, so you won’t be as tempted to transfer money from your savings to your checking anytime your budget gets tight.

If you’re saving for a long-term goal, such as a down payment on a home that you may want to buy in the next 10 years, consider using an investment account where your money can potentially grow faster with the help of the markets.

3. Boost your retirement savings

Even if you’re already putting money away in a 401(k) or IRA, it never hurts to give your nest egg a little more padding. Because the earlier you start saving, the more time you have to take advantage of compound growth.

If you have $20,000 in an IRA that grows at a hypothetical 6 percent a year, in 20 years you’ll have more than $66,000 in that account, even if you never add to it again. But if you bump that amount up to $22,750, you’ll have just over $75,000 in that same time frame. Putting your tax refund to work today could mean an extra $9,000 in your pocket during retirement.

401(k) and IRA contribution limits are occasionally increased to account for inflation and in 2025, 401(k) contribution limits increased from $23,000 in 2024 to $23,500. IRA contribution limits remain at $7,000. If you are younger than 50 in 2025, you can contribute up to $23,500 to a 401(k) and $7,000 to an IRA. In 2025, you can make a catch-up contribution of up to $7,500 to your 401(k) if you are 50-59 years old or if you are older than 63 years old. If you are 60, 61, 62, or 63 years old, your catch-up contribution limit is higher: $11,250.

4. Treat yourself to a splurge

Yes, you read that right. Setting aside a portion of your refund for a splurge is not only well-deserved, it can also help you stay on track with your other goals.

So whether that means a fancy dinner for your next date night or an outing with friends, your refund can be used for something fun without having to dip into your everyday budget. In fact, whenever you receive any sort of windfall—such as a bonus or an inheritance—consider setting a percentage aside for discretionary spending so that you get to enjoy some of that money now, in addition to using it for other goals.

5. Consider other financial goals

If you’ve covered the bases above and still have money left from your refund check, ask yourself whether there are any other financial goals you’ve been shortchanging. Try to think about the goals that really matter to you, and consider dedicating at least a portion of your refund toward those goals.

These goals will, of course, vary from person to person. But common examples might include saving for your child’s future educational costs, starting a business, or leaving behind a legacy that you can be proud of. If it’s important to you, your tax refund can help you start laying the groundwork toward one day making it a reality.

Define your priorities

Of course, how you decide to use your refund really depends on your situation and what you’re trying to achieve. You might have one particular goal you’re focused on, and that may be where your refund goes. Or you might put the money toward several goals, allowing yourself to enjoy something right now and save for something you’ll enjoy in the future.

Not sure how you should put your refund to work? Your financial advisor can help you understand how the different pieces of your financial plan all fit together and guide you toward the best decision for you.