Putting your tax refund to work

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 04/13/22


As of April 1, 2022, more than 92 million taxpayers filed their income taxes and the IRS has processed 89 million returns. The average refund to date is $3,226, reflecting an 11.5% increase over last year.

Nearly half of respondents (46%) in a recent survey said they plan to save their tax refund this year, up from 41% in 2021. (Lending Tree).

The survey also found greater numbers of younger workers and women planned to save. More than 60% of Generation Zers, (ages 18 to 25), said they will put their refund into savings, compared with 47% of millennials and 41% of boomers. Gen Zers were also more likely to invest the funds.

The average tax refund has increased in recent years.

Average tax refund rising

(average refund by year)

Year Average refund
2022 $3,226
2021 $2,815
2020 $2,549
2019 $2,869
2018 $2,891

Source: IRS, Filing statistics by year, 2022.

Receiving extra cash can create an opportunity to contribute to retirement savings or other priority saving goals. Investors may want to check in with an advisor to determine the best way to use the funds.

Here are some ideas for those saving their tax refund.

Pay off debt

Multiple surveys point to paying off debt as a priority among savers. Depending on the investor’s situation, this could mean reducing credit card or student loan debt. Consumer credit soared in February, rising to an annual rate of 11.4% from 2.4% in January, the Federal Reserve reported. This is the highest rate since November 2001. Revolving credit, which includes credit cards, rose at a rate of 20.7% in February from 4% in January. Nonrevolving credit (student and car loans ) rose 8.4% compared with 1.9% in the previous month.

Add to an emergency fund

Most households recognize the importance of emergency savings. These funds became particularly important during 2020 for many families facing economic challenges due to the pandemic.

Still, it is not always easy to save. In a Federal Reserve survey many investors (36%) reported they would not be able to cover a $400 emergency expense with cash or a cash equivalent in 2020. For those unable to cover the expense, 15% said they would put it on a credit card and pay it off over time, 9% said they would borrow from family or friends, and 6% said they would need to sell something.

Unexpected medical expenses can also present challenges. The report found that 17% of adults had major, unexpected medical expenses during the 12-month period, with the average amount ranging from $1,000 to $1,999. Among respondents, 16% had debt from their own medical care or that of a family member. Also, 6% noted they had to pay out-of-pocket expenses for Covid-19 medical care.

Opinions vary on how much people should save in their emergency fund, but the assets should cover basic expenses such as rent or mortgage and other regular payments, as well as extra funds for unexpected expenses including car repairs or medical costs. Some investors try to save enough to cover three to six months of expenses. A professional advisor can help set a goal for this account, depending on the individual’s financial situation and ability to save.

Open a Roth IRA

Contributions to a Roth IRA are not tax-deductible, but the interest earned, as well as withdrawals in retirement, are tax free. Roth IRA accounts can also help savers establish tax-diversification among retirement assets, which can be used as a tax-smart strategy in retirement. Some investors may not realize that a Roth IRA can be used to help save for a child’s college costs, and if the money is used for education, the 10% early withdrawal penalty is waived.

Contribute to a 529 savings plan

Family members or friends can contribute to a 529 college savings plan on behalf of a child. Earnings grow tax free and are not taxed when used for qualified higher education expenses.

Fund a health savings account (HSA)

HSAs are typically offered to individuals enrolled in health insurance plans with a high deductible. Most HSAs are available through an employer. But under the Affordable Care Act, individuals may purchase an HSA through a state exchange. There is no time limit for distribution of the funds, and these accounts are portable.

HSAs also offer a “triple tax benefit” for savers. Contributions are made with pretax dollars, assets grow without incurring a tax on the interest, and money withdrawn is tax free as long as it is used for qualified medical expenses.

The IRS announced higher contribution limits for HSAs in 2022. The annual limit for individuals is $3,650. For family coverage, the limit increased to $7,300.

Contribute more to workplace savings

Individuals with access to a retirement savings plan at work may want to use the funds to ensure they take advantage of the maximum savings allowed. For example, the amount allowed for catchup contributions for individuals age 50 and older in a 401(k) is $6,500 per year in 2022.

Consider seeking advice to save for the future

For investors expecting to receive a refund this year, tax-filing season is an opportune time to consider investing that extra cash in the future. For current IRS rules for retirement and other accounts, see “2022 tax rates, schedules, and contribution limits.”

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