Maximizing Your Tax Refund: Smart Investment Strategies
Filing taxes is rarely enjoyable, but for many, there’s the prospect of a refund check at the end of the process. As of February 14, 2025, the average refund is $2,169—about one-third less than last year’s amount. Fewer individuals have submitted their returns so far this year, but there is still plenty of time left in the tax season.
Many already have plans for their refunds, whether it’s paying off debt or treating themselves. However, considering the option to invest that money could yield significantly greater returns long-term. Though this requires forgoing immediate access to funds, the potential future benefits can be substantial.
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Potential Growth of Your Average Tax Refund by Retirement
Investing your tax refund can foster much quicker growth compared to leaving it in a savings account. The ultimate value of your refund depends on factors like the investment returns you achieve and how long you leave the money invested. The table below illustrates what a $2,169 tax refund could grow to over various timeframes and rates of return.
|
Years Invested |
6% Average Annual Rate of Return |
8% Average Annual Rate of Return |
10% Average Annual Rate of Return |
|---|---|---|---|
|
1 year |
$2,299 |
$2,343 |
$2,386 |
|
5 years |
$2,903 |
$3,187 |
$3,493 |
|
10 years |
$3,884 |
$4,683 |
$5,626 |
|
15 years |
$5,198 |
$6,880 |
$9,060 |
|
20 years |
$6,956 |
$10,110 |
$14,592 |
|
25 years |
$9,309 |
$14,854 |
$23,500 |
|
30 years |
$12,458 |
$21,826 |
$37,848 |
|
35 years |
$16,671 |
$32,069 |
$60,954 |
|
40 years |
$22,310 |
$47,120 |
$98,167 |
Source: Author’s personal calculations. Dollar amounts are rounded to the nearest dollar.
While you can’t predict your exact investment returns, understanding your timeline until retirement allows you to estimate the potential worth of that tax refund down the line. Investing could cover several months of living expenses during retirement, making it a significant consideration. Young workers today might even see it cover a year or more of expenses.
Should You Invest Your Tax Refund?
Choosing to invest your tax refund could be a wise strategy if you do not need the money in the near future and do not have high-interest debts. For those with credit card debt or payday loans, using the refund to pay off these obligations could save money on interest costs over time.
If you decide to invest in an IRA, be cautious about the annual contribution limits. For 2025, you can contribute up to $7,000 if you are under 50, or $8,000 if you are 50 or older. Most individuals likely haven’t reached these limits early in the year, but previous contributions might affect your options.
Furthermore, it is perfectly reasonable to invest only part of your tax refund if you’re unsatisfied with committing the full amount. You can allocate a portion to investments while saving or spending the rest, such as keeping it in a high-yield savings account for later use.
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