What to do with your tax refund: 3 tips

Even if your budget is on track and you’re saving money regularly, it never hurts to have a little extra cash. As tax season goes into full swing, you may be excited about the possibility of receiving a sizable tax refund. In 2025, for example, the average direct deposit refund amount totaled $3,230, according to the IRS.

Even though tax season happens every year, you may have found yourself wondering, “What do I do with my tax refund?” If you’re expecting a refund this year, now’s the time to consider where it fits into your financial plan. Preparing in advance for ways to spend your tax refund reduces the odds of being caught off guard when it goes into your bank account. Putting in the prep time now may also help you avoid splurging on impulse purchases.

Here are a few examples of what to do with your tax refund:

There are many possibilities for what to do with your tax refund, especially if you have multiple financial goals. Mario Costanz, CEO of a tax preparation service, says to ask yourself which of your goals would benefit the most from an unexpected cash infusion.

Sometimes it’s a tough call, he adds, since financial priorities often compete. You may be torn between saving for a child’s college tuition, putting away money for retirement or paying off debt.

Applying a refund to debt may seem smart if you’re paying high interest on credit cards or loans, but it might not be one of the best ways to use your tax refund wisely if you have no savings at all. Sam Price, an independent insurance broker and owner of a life insurance agency, says starting an emergency fund with your refund might make more sense.

“Emergencies are going to happen,” Price says. “And when they do, having three to six months of savings will stop you from having to charge more debt on a credit card that you’ll have to pay back with high interest rates.”

Saving that amount of monthly expenses in an emergency fund is a way to use your tax refund wisely, he adds. It could help you cover minor setbacks like a car repair as well as major events like job loss or an extended illness that keeps you out of work. According to a 2026 Bankrate survey, less than half (47%) of Americans have the money to cover a $1,000 emergency expense.

A savings account is often the most convenient place to keep your emergency funds. Most banks let you deposit your tax refund directly into your account. And with a Capital One 360 Performance Savings account, you can give your emergency fund some serious momentum with a great rate that helps every dollar go further.

Besides saving for emergencies, paying down debt and funding other financial goals are other great uses for your tax refund. If you have multiple debts, consider applying your refund to those with the highest interest first.

“Paying down $500 of a $3,000 credit card bill charging you 17% interest will save you more than paying off an extra $500 on your car loan which may be charging you 5%,” Costanz says.

This practice could also improve your credit score, which is a number that reflects how likely you are to repay borrowed money on time. 

One factor that affects your credit score is your credit utilization ratio, which measures how much of your available credit you’re using on revolving accounts. Credit cards are a form of revolving debt. This means you can use more—or less—of your credit limit as you make purchases and pay down your balance. Costanz says using your refund to pay down credit cards that are close to their limits can help improve this ratio.

If you’re behind on saving for retirement, you could split your refund between debt repayment and an individual retirement account (IRA).

An IRA is a tax-advantaged savings account used for retirement investment. There are two main types of IRAs:

• A traditional IRA lets you contribute pre-tax or tax-deductible money that grows tax-deferred. This means you pay income taxes when you withdraw it in retirement. 

• A Roth IRA is funded with after-tax money. Your investments grow tax-free, and qualified withdrawals in retirement are also tax-free.

Price says if saving for a home is also one of your goals, a Roth IRA could be a good fit. These accounts allow you to save for retirement but have an added benefit. Qualified first-time homebuyers can withdraw up to $10,000 without penalty to use for a down payment or other homebuying expenses, such as closing costs. Funding a Roth IRA could help you work toward saving for retirement and homeownership at the same time.

When considering what to do with your tax refund, you can look past saving and debt repayment to find other ways to use your tax refund wisely. Spending money on yourself is important if it helps to improve your overall well-being.

Using part of your tax refund for health-related expenses is a great idea. For example, paying for a year’s gym membership, enrolling in yoga classes or hiring a personal trainer can all be constructive ways to use your refund. If you struggle with back issues or poor sleep habits, a new mattress could also be a solid investment.

You could also use your refund to enhance your professional skills to increase your earning potential. If you work in a field that relies heavily on technology, for example, you might consider enrolling in a coding class. Or, why not use your refund to turn the business idea you’ve been considering into reality?

“Investing in yourself may be one of the best ways to use your tax refund,” Costanz says. “By committing energy and financial resources to your own personal development, you can learn new skills, pursue new interests or even build your career.”

Even if you plan to spend part of your tax refund, consider putting the extra cash in your savings account in the meantime. That way, you can be earning interest until you’re ready to make your purchase. The Capital One 360 Performance Savings account rate is above the national average, helping you earn more over time. It’s smart to put your savings into an account that offers a strong rate from day one.

There are so many ways to spend your tax refund. While it’s tempting to go on a shopping spree, that approach virtually guarantees your windfall won’t last. 

Some recommendations on what to do with your tax refund:

• Build or strengthen an emergency fund so you’re covered when unexpected expenses come up.

• Pay down high-interest debt, especially balances that are costing you the most in interest.

• Invest in long-term goals (like retirement or saving for a home) or consider building a business if you want a career change.

Before deciding what to do with your tax refund, it helps to step back and think about your overall financial priorities.

Make a simple plan for your tax refund before it hits your account so you’re not making a rushed decision. Then stick to that plan so your refund moves you closer to your goals, not just short-term purchases.

Ready to start planning? Capital One’s online process lets you open a 360 Performance Savings account from your couch in about 5 minutes.