7 Money-Smart Ways to Spend Your Tax Refund

Shore Up (or Start) Your Emergency Fund

Even if you're fully employed now, there's no guarantee that your hours won't be cut, your salary reduced, or your job eliminated down the road. That means it's more important than ever to have money set aside for emergencies. That way, you won't have to run up credit card debts or raid your retirement savings to pay the bills until you get back on your feet.

Aim for six months of living expenses — more if you're the sole provider for your family. Interest rates are still low right now, but you can eke out higher rates by putting your savings in an online bank account. Look for one with no minimum balance requirement or monthly fees.

Pay Off High-Interest Debt

In an effort to curb inflation, the Federal Reserve is expected to hike short-term interest rates several times this year, and that means credit card rates will rise, too. The average credit card interest rate is already a hefty 16.36% as of April 20, 2022, according to CreditCards.com. Pay off your unpaid balances and you'll get a return on your investment a successful hedge fund manager would envy. If you're able to pay off the entire balance, you'll also eliminate a monthly expense, which will give you some breathing room if you lose your job.

Save for Retirement

If you have a Roth or traditional IRA, consider putting some of your refund money in the account now so you'll have more money when you retire. If you don't already have an IRA, think about getting one. The maximum amount you can contribute to your IRAs in 2022 is $6,000 — $7,000 if you're 50 or older — so you can stash your entire refund there if you don't need it for anything else.

If you're not inclined to build your own portfolio, consider investing in a target-date fund, which will invest in a mix of stocks and bonds, based on how many years you're away from retirement.

Invest in a 529 College Savings Plan

Contributions to a 529 college savings plan grow tax-free, and withdrawals aren't taxed if you use them for qualified expenses, such as college tuition and room and board. You can invest all or a portion of your tax refund — 529 plans typically have very low minimums. Plus, your state may give you a tax deduction or credit if you invest in your own state's plan. If your children are young, you have many years for investments in the plan to compound and grow. To research plans, go to savingforcollege.com.

Protect Yourself from Unexpected Health Care Costs

If you have a high-deductible health insurance plan (a deductible of at least $1,400 for single coverage or $2,800 for family coverage), you can contribute to a health savings account. An HSA gives you a triple tax break — your contributions are tax-deductible (or pre-tax if through your employer), the money grows tax-deferred, and you can use it tax-free to pay out-of-pocket medical expenses in any year (there's no use-it-or-lose-it rule).

The CARES Act increased the types of expenses that are eligible for tax-free withdrawals from your HSA. In addition to health insurance deductibles, co-payments, prescription drugs and medical expenses that aren't covered by your insurance, you can use tax-free withdrawals to pay for most over-the-counter medications and feminine-hygiene products. Although health-insurance premiums are typically not considered qualified medical expenses, there's an exception if you use withdrawals to pay COBRA premiums or for other health-insurance premiums if you're collecting unemployment benefits.

Protect Yourself from Natural Disasters

Hurricane season is almost here, so if you live in a vulnerable area, consider using your refund money to protect your home. A home generator will keep the lights on and the food cold during a power outage. A 6.5 kw portable home generator costs about $800 to $1,000. You also can use the money to pay someone to trim your trees, which will help protect your home from some of the most common types of storm damage.

Upgrade Your Home Office

If the COVID-19 pandemic still has you working from home, you're probably well aware by now of the inadequacies of your home office. Use your refund to buy a standing desk — the Uplift V2 can be customized for a wide range of heights and retails for about $550. Is your back acting up? Maybe you need a new chair. The Alera Elusion Mesh Mid-Back Swivel/Tilt Chair, which retails for about $160, features a contoured seat cushion that's designed to relieve pressure on your legs.