When planning for taxes, most of us target (or hope!) for a small refund or a small tax bill. However, you might receive a larger-than-expected refund for any number of reasons. So what should you do with your windfall? 

Pay Down Debt

One of the best uses for your refund is to pay down any high-cost debt. Unless you are on an introductory rate, your credit card debt is probably costing you a pretty penny. For example, say you have a credit card account that charges 18% interest and $10,000 in credit card debt. If the minimum payments are equal to interest plus 1% of the balance, it will take 342 months to pay off the debt by making minimum payments alone. That’s 28.5 years, and during that time, you’d pay $14,423 in interest – much more than the original balance on the card.

For other debt, it will largely depend on your current interest rate. Many existing mortgages, lines of credit, student loans, and auto loans are at extremely low rates. While paying down debt is never a bad use of extra money, the lower loan rates on these liabilities make it less urgent. However, if you have multiple debts, when deciding which to pay off first, start with the highest interest rate loan and work your way down.

Save for College 

If you have children or grandchildren, consider setting up or adding your refund to a 529 college savings plan.  The money will grow tax-free and can be withdrawn tax-free for qualifying expenses. 

Indiana residents, who contribute to the Indiana CollegeChoice Plan, get a 20% state tax credit for contributions up to $7,500 per household. This credit is available every year for contributions to the Indiana Plan.

Save for Retirement

Consider contributing to an IRA or a Roth IRA. The appropriate choice will depend on your tax situation. By putting money into an IRA, you get the benefit of tax-deferred or tax-free growth in the case of a Roth. That means more of your money can continue growing for you over time. The younger you are, the longer your money will work for you.

Save for a Rainy Day

If you are debt-free, saved adequately for college, and maxed out your IRA contributions, you can still use your refund strategically. First, check the balance of your emergency fund, and if the total is equal to less than three to six months of living expenses, add your refund to this account. 

However, if your emergency fund is adequate and you don’t anticipate needing the money soon, you can add the refund to a brokerage account or invest directly with a mutual fund company. With good investment choices, your money could grow by the time you need it.

The Splurge!

Are you dreaming of a vacation, a home remodel, or a new outfit? Don’t feel guilty if you spend some of your refund on yourself. What’s life without a little fun, and you are stimulating the economy, right? Keep your overall financial picture in mind. 


If you are employed and concerned about future large refunds, adjust Form W-4 (“Employee’s Withholding Certificate”). This form gives the employer information needed to withhold taxes from each employee’s paycheck, and making a few changes can impact future tax liability. Whether employed or retired, review your quarterly estimated payments for adjustments. It’s also a good practice to see if any changes should be made to the fourth quarterly estimated payment.


Tempting as it may be to spend a tax refund immediately, your overall financial situation could be improved by instead using that refund to help you meet your long-term goals. It does require a sacrifice, but it will be well worth it in the long €run.

Meredith Carbrey, CFP, is a Senior Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Meredith at mcarbrey@bedelfinancial.com

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