Tax time is right around the corner, and anyone anticipating a refund has probably started thinking about how that refund will be spent. For some people, a tax return is seen as a good excuse to buy a luxury item or take a vacation. For people who are savvy with their personal finances, a tax refund check is a useful tool for getting ahead financially.

The average refund over the last several years has run about $3,000, which is a great way for a first-time investor to get started with saving, or for a seasoned investor to bolster their nest egg. It can also be used to pay off debts or smartly refinance other ones. Here are some ways to get the most out of your tax refund check.

1. Pop in a new CD

A certificate of deposit, or CD, is a savings account that pays interest over a certain term, typically three to 10 years. Longer-term CDs usually pay larger dividends, but the money is tied up over the term. Dividends can be over or around 2 percent in today's market, so an investment of $3,000 into a 60-month CD would yield about $310, or over $650 on a 120-month CD.

CDs are generally low-risk because they are FDIC insured, and the minimum amount required to invest can vary. Click here to see our CD page to learn about CDs and current rates available.

2. Pad your 401(k)

In an ideal world, everyone would pay the maximum possible amount into their 401(k) account. If you aren't able to save enough to max out your annual 401(k) contributions, your tax return can help you get there. Most workers can contribute up to $17,500 per year, and workers over age 50 can add an additional $5,500 to that amount.

3. Stash more for retirement

Any wage earner making less than $95,000 per year can open an traditional IRA, while those making $100,000 or less can open a Roth IRA. An advantage to IRAs is that taxes have already been paid on the money deposited, so the money isn't taxed again when it is withdrawn. There are pros and cons to opening a Roth IRA, which can have more flexible terms than a traditional IRA. Speak to a financial advisor to determine which is best for you.

4. Improve your saving account

If having money tied up for too long is going to be a problem, a savings account or money market account or interest-bearing checking account might be right for you. The interest rate is much lower than financial products which require longer investments, but your money is more accessible.

5. Dump the debt

Paying down on high-interest credit cards can be one of the biggest money-saving moves you can make. While it is important to have savings, interest on credit card debt may be eating away at any gains being made in other investments. Paying off credit cards is a smart money move, but only as long as you don't celebrate the move by running up the card again.

6. Make a dent in the mortgage

Paying an extra $3,000 on a mortgage over and above normal payments could lead to a substantial savings in interest over the term of the loan. Although it's unlikely and depends on interest rates, putting a chunk of money toward the mortgage could save more over the long term rather than paying off some credit cards. If you don't have any big high-interest credit card debt, and if paying a mortgage off early is one of your financial goals, then putting your tax return into your mortgage is a no-brainer. If you're planning on buying a home, then it makes sense to drop the tax return into your down payment savings, or to use the money to get that savings started.

7. Cut the car payments

If you have a monthly car payment, you can shorten the term of the loan by applying your tax return to the loan. Another option is to trade in your current car for a new one, and by using the tax return as a down payment, you may be able finance a new car for a shorter term loan. With a hefty down payment, you may also be able to get an excellent interest rate on the new car loan. While automobiles generally aren't considered to be good financial investments, most of us need to have one and are a cost of doing business and living in the world. Having a safe, reliable car can be a good investment toward well-being and stability.

8. Deck the halls

If you're still feeling a financial hangover from last year's holiday spending, turn your tax refund into a Christmas club account for next year. You'll have peace of mind knowing your budget will be on track and you won't have to suffer painful aftereffects at this time next year.

Related Articles
  1. Taxes

    New Taxes Under The Affordable Care Act

    Find out what you need to know about the 21 new tax changes linked to the ACA.
  2. Taxes

    How To Negotiate Back Taxes With The IRS

    Recently, the IRS has been more amenable to working out late tax payments. But you have to address the problem up front, and don’t keep Uncle Sam waiting on his tax money.
  3. Taxes

    How To File Your Child's First Income Tax Return

    Use this quick parental guide to help your child learn the tax filing process and establish good habits.
  4. Taxes

    How To Get The Most Money Back On Your Tax Return

    These tips will help you get a larger refund this year, while teaching you how to pay less taxes going forward.
  5. Taxes

    Tax Breaks For Second-Home Owners

    Owning a second home is a great investment for a variety of reasons, but you need to know the tax implications of multi-home ownership.
  6. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  9. Professionals

    Top Questions to Ask When Choosing a Robo-Advisor

    Think a robo-advisor might be the right choice for you? Be sure to ask these questions first.
  10. Professionals

    Are Hedge Fund ETFs Suitable for Your Portfolio?

    Are hedge fund ETFs right for you? Here's what investors need to consider.
RELATED TERMS
  1. Financial Singularity

    A financial singularity is the point at which investment decisions ...
  2. Wealth Management

    A high-level professional service that combines financial/investment ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
  5. Anchoring and Adjustment

    Anchoring and adjustment is a cognitive error described by behavioral ...
  6. Robo-advisor (robo-adviser)

    Definition of Robo Financial Advisers
RELATED FAQS
  1. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  2. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  3. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  4. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  5. Are Social Security benefits taxable after age 62?

    Eligibility to collect Social Security benefits begins at age 62. Many seniors, to collect larger benefit amounts, wait until ... Read Full Answer >>
  6. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!