3 Ways to Make the Most of Your Tax Refund

If you play your cards right, you can grow your tax refund into a larger sum.

Many people look at their tax refunds as a gift from the IRS. But your refund is anything but.

When you get a refund, it means you overpaid your taxes and gave the government an interest-free loan for nothing in return. That's actually not a good thing. If you're getting a tax refund this year, it means you lost out on the opportunity to make the most of that money the year before. If you make these moves, however, you can compensate for that lost time and end up with more money in the process.

1. Put your tax refund into a high-yield savings account

If you don't need your tax refund to pay for near-term bills, then socking it away in the bank could help you boost it over time. Now to be fair, these days, savings accounts aren't paying much interest. But even so, you'll earn something on your money by putting it into the bank.

Say you have a $2,000 refund and put it into a savings account paying 0.5% interest. In 10 years, that refund will be worth just over $2,100.

2. Put your tax refund into an IRA

IRAs let you set money aside for retirement. And one of the best things about them is that you can invest your money so it grows into a larger sum over time.

So, let's say you're sitting on a $2,000 tax refund. If you invest that money at an average annual rate of 8%, which is a couple percentage points below the stock market's average, you'll grow that sum into just over $20,000 over a 30-year period. Just as importantly, you'll be setting yourself up with money to cover your living expenses once you're no longer working.

3. Invest your tax refund in a brokerage account

You can invest your tax refund in an IRA, but in doing so, you lock yourself into certain rules you may find restrictive. For example, withdrawing funds from an IRA before age 59 1/2 will generally result in a 10% early withdrawal penalty, and that's not something you want to pay. You may be more comfortable with the idea of investing in a regular brokerage account. If you keep your $2,000 refund invested for 15 years at an 8% average annual return, you'll turn it into almost $6,350.

Make the most of your tax refund

A refund is money you earned but never collected upfront. And so before you take that money and use it to splurge, you may instead want to explore your options for growing it into a larger sum.

Plus, your tax refund might serve the very important purpose of saving you money. If you owe a $2,000 balance on your credit cards, for example, but you use your refund to pay it off on the spot, you'll save yourself from accruing interest. It therefore makes sense to think about some of the different financial goals you have and see how your refund might help make them possible.