Nearly two in three taxpayers got a federal refund for 2023, averaging $3,167, according to data from the Internal Revenue Service

PHOENIX – This is the time of year when millions of Americans receive their biggest annual financial windfall. It’s not a winning lottery ticket or a favorable bet on March Madness but, rather, a federal income-tax refund, and possibly a state refund, too.

Nearly two in three taxpayers got a federal refund for 2023, averaging $3,167, according to data from the Internal Revenue Service. Many of these households also are living hand to mouth, suggesting that they haven’t put refunds from past years to good use.

Here are some suggestions for making the most of this financial opportunity:

Pay off high-interest debt

If there’s one recommendation on which advisers nearly universally agree, it’s this one.

‘It’s an immediate return on investment by reducing interest costs and improving financial stability while also providing peace of mind and a sense of relief from financial stress,’ said Sam Swift, a certified financial planner and CEO of TCI Wealth Advisors in Tucson, Arizona

Tackling high-cost debt is imperative given that credit cards can carry interest charges of 22% or higher, said Michael Sullivan, a personal finance consultant at Take Charge America, a credit-counseling and debt-management company in Phoenix.

‘Payday-loan interest rates or auto title debt can be much higher,’ he added. ‘These are the first debts to be attacked, with all available funds directed at the highest-interest debt.’

Start or add to an emergency fund

It’s not especially difficult to put aside money in an account devoted to meeting unexpected obligations, yet many Americans haven’t done it. Saving even modest amounts of money can be difficult.

Nearly half of Americans are stressed in this area, according to a February survey by Bankrate.com that found 13% of respondents have no such savings at all, while another 33% have some savings – but even higher credit-card balances.

Sullivan considers $1,000 the minimum target for which you should aim.

‘If there is less than $1,000, (it’s not) an emergency fund at all because even one accident or illness with a trip to the emergency room can easily cost more than $1,000,’ he said. ‘Without (adequate) savings, emergencies turn into high-interest debt.’

Steven Conners of Conners Wealth Management in Scottsdale considers emergency funds to be more important now than in recent years because of all the turmoil and uncertainty in the economy, such as tariffs and ongoing layoffs of federal workers. ‘Be more conservative than you’d normally be,’ he suggested.

Savers should strive to find accounts yielding at least 4%, he said. You can earn that on money market mutual funds and some bank and credit union vehicles, especially if you ask for better deals, he added.

Put money in retirement account

Assuming your short-term needs are covered with an emergency fund and you are paring you credit-card debts, you can turn your attention to longer-term goals. Retirement accounts such as Individual Retirement Accounts or 401(k)-style plans fit the bill, providing tax incentives.

With traditional IRAs or 401(k) plans, you generally can reduce your taxable income by the amount of your contributions. With Roth versions of these accounts, you don’t get a front-end benefit, but the money comes out tax-free years later, when you withdraw it. Thus, you sacrifice some near-term tax help for benefits down the road.

Swift considers retirement vehicles, especially Roth accounts, to be good choices for tax refunds if you can afford to fund them. ‘Even small contributions can grow significantly over time, helping you build wealth tax-free for your future,’ he said.

If your employer offers matching funds on contributions to a 401(k) account, you can stretch your tax refunds even further. ‘Always at least contribute up to the amount your company is matching – (it’s) free money,’ Swift said.

Others smart moves to ponder

There are other considerations when it comes to tax refunds. If you get a large amount, Sullivan suggests changing your withholding percentage by filling out a new W-4 form through your human-resources department. Why do this? Because refunds represent money that you essentially have loaned, interest-free, to the Internal Revenue Service and perhaps a state tax agency.

To complete the picture, he suggests taking the dollar amount by which your future paychecks increase through lowered withholding, then depositing that money automatically into a high-interest savings account. It’s a move that essentially spreads out your refund, gives it to you earlier and allows you to earn interest sooner. But the strategy would backfire if you spend, rather than save, the incremental amounts.

Excessive spending is the root of the problem for most anyone with high debts or low savings. Solving this issue requires discipline, which isn’t easy.

But there are ways to add guardrails, such as delaying certain purchases to wring some emotions out of the decision. If there’s something you really want to buy, like new golf clubs, consider a cooling-off period of perhaps a week or 10 days, Connors said.

Chances are, you will abandon certain purchases. But if you really want to buy something after after that time, ‘You will at least know your emotions are less involved,’ he said.