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What are you going to do with the IRS refund? We have 6 suggestions

Do you already have a destination for the tax that will be returned to you? If not, we have some suggestions for spending your IRS refund in ways that keep your finances healthy.

Many families rely on the return of excess tax withheld from the previous year to help pay expenses. Others opt forspend” the IRS refund on vacation, in more efficient appliances or even in works they have to do at home. Still others choose to put that money to work for them, investing in financial investments.

In this article, we give you some suggestions on how to use your IRS refund.

How to spend your IRS refund smartly?


Pay any debts you may have

The biggest enemy of savings (and financial stability) is debt. The good news? You can spend the IRS refund to tackle the problem and regain your peace of mind.

Whether they are debts to Social Security, the Tax Authorities, service providers (electricity and water bills that were delayed), take advantage of this extra income to pay them, if not in full, at least partially. This avoids or minimizes the payment of fines and interest that may be associated with it.

Spending the IRS refund to pay off credits is also a rational decision, especially when these have very high interest rates. This is the case with credit cards, for example, whose fees are normally very close to the maximum fee allowed by Banco de Portugal.

In addition, it may be worth paying off car and personal loans, which, right after cards, are the ones for which you pay the highest interest rates.

Even if you are not able to repay the loan in full, it will reduce the amount owed and, more importantly, reduce the monthly installment, which can make all the difference in your family budget.


Create or strengthen your emergency fund

Having a financial cushion ready to deal with contingencies, such as unemployment or illness, a breakdown in the car or even the plumbing at home, is not only necessary but also makes even more sense in a context of uncertainty such as the one we are experiencing today. .

Experts advise saving the equivalent of between 6 and 12 months of your fixed monthly expenses. It could be, for example, a current savings account.

The important thing is that this money is out of sight, but accessible at any time so that it can be easily mobilized in case of need. Then forget about it. Pretend it doesn’t exist, and only keep it for an emergency.

importance of emergency fund in time of crisis

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Once your debts are paid off and your emergency fund reinforced, you can start thinking about saving. If you’re not into big adventures and prefer to invest your money in a product with guaranteed capital, which also doesn’t require a large investment, Savings Certificates or Savings Value Treasury Certificates can be good alternatives.

These products are both public debt and guaranteed by the State. None of them have any subscription, maintenance or withdrawal charges, but there are some differences between them.

To subscribe to Savings Certificates, you only need 100 euros and receive a variable base interest (indexed to the 3-month Euribor) plus, from the second year onwards, a permanence premium that can reach 1%. You just cannot withdraw the money during the first 3 months. After that, you can do it at any time and free of charge.

In the case of Savings Value Treasury Certificates you have to invest a minimum of €1,000 and you cannot withdraw the money during the first year. From then on, you can redeem it in whole or in part whenever you want. But if you do so before the subscription anniversary, you lose part of that year’s interest.

If you’re willing to take some risks to make your money grow, you can spend your IRS refund, or part of it, investing in mutual funds.

Investment funds are collections of shares or bonds, managed by a specialized entity that, with the money of several small investors, makes investments in different types of companies according to the indications of the fund.

With only 100 euros you can subscribe. It can be a good medium/long term savings solution to be able to take that dream trip or buy a car. It is important, however, to ensure that the investment fund (more conservative or more dynamic) suits your risk profile and that, before subscribing, you are well informed about redemption conditions and commission costs.

Start investing little money

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Can I start investing with little money?

Another smart way to spend your IRS refund is to start preparing for your retirement. For many years of work ahead of you, the sooner you invest your money in a Retirement Savings Plan, the greater the long-term return. If you already have one, you can reinforce it and thus capitalize on your money.

PPRs have great advantages from a tax point of view, firstly because they benefit from a much lower tax rate to which other products are taxed. In addition, being able to deduct part of the money you put there with the IRS.

If you prefer, you can also use PPR as a savings product that allows you to redeem the money whenever you want and without having to wait for retirement age. But in that case you cannot make tax deductions. Keep this detail in mind when filling out the IRS return.

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Article originally published in July 2019. Last updated in March 2023.

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