Top 5 Mistakes People Make With Their Tax Refunds

Tax Refund is shown using the text and photo of dollars

According to a 2024 GOBankingRates survey, more than 65% of Americans plan on receiving tax refunds this year. This extra money can be a great way to tackle some of your financial objectives.

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While most plan to pay off debt, increase their savings or invest the money, others may not be as smart with the additional money in their bank accounts. Keep reading as we dive into some of the biggest mistakes you can make with your tax refund.

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Not Having a Plan

Planning is important for a lot of things in our lives. Planning what you want to do with your tax refund is no different. Before the refund makes it to your bank account, consider some of your current financial goals. You may have credit card debt you need to pay off. You may want to purchase your first home. Or you could start a college fund for your child. Understanding your financial goals will help you plan for the tax refund you’re about to receive.

However, the plan is only the first step. Once you receive the refund, it’s time to put the plan in motion. Too often, people either don’t have a plan or don’t implement the plan. The refund will then sit in their bank account and be used for other things.

“Whenever you get a tax refund or other large windfalls such as a bonus, you should use the money as part of your financial plan, not as ‘found money,’” said Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth. “When you get a refund, it is not a gift from the government, but a repayment of the money you loaned them across the year.”

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Forgetting the Emergency Fund

Having an emergency fund is one of the most important financial moves you can make. This will provide you with a financial cushion if an unexpected expense occurs. However, some people will ignore the lack of an emergency fund when receiving a tax refund.

While most experts recommend having at least three to six months’ worth of expenses in an emergency fund, don’t feel like you need to get there all at once. Take a portion of your tax refund and put it toward your emergency fund, then use the remaining money to fund the other items that were part of your plan.

Spending on Wants While Ignoring Your Needs

When you receive an extra amount of cash, it can be easy to think about everything you’d love to have. However, following through on these wants can cause you to neglect the things that matter most.

“I’ve seen people use the money for all types of wants, rather than needs or with an intentional plan,” Zigmont said. “Vacations are very common. While we all want a vacation, we need to plan and save for travel, not just go. It can be tempting to use the money for a vacation; but, if you are still trying to get out of debt, it should go towards that.”

Ignoring Retirement

If you’re recently out of college or still early in your working years, you might not be thinking much about retirement. However, this is the wrong mindset to have. Investing as much as possible for your retirement at an early age will allow you to keep yourself on track to retire comfortably on your own timeline.

If you don’t have high-interest credit card debt and fail to put a portion of your tax return toward your retirement, you’re missing out on a big opportunity to put your future self in a better position financially.

“Putting a tax refund into an IRA or retirement savings account not only supports long-term financial goals but can also provide tax benefits for the following year,” said Mike Kojonen, founder of Principal Preservation Services. “This move is particularly advantageous for those who feel they’re behind on their retirement savings.”

Not Asking for Help

Receiving a large amount of money can be intimidating for many people. If you receive a tax refund and don’t know what to do with it, that’s OK. When it becomes an issue is when you don’t seek the advice you need to make a well-informed decision. Financial planners can help you assess your financial situation, so you know the best way to use your refund.

Once you have this year figured out, consider working with a CPA or tax preparer to maximize your withholding. Ideally, you never want to receive a tax refund. When you do, you’ve provided the U.S. government with an interest-free loan. Working with a tax professional can help you adjust your tax withholding so your refund is as close to $0 as possible.

The Bottom Line

Receiving a tax refund can be exciting. It’s going to provide you with a little extra cash. However, making a plan and being smart with the money is important. Use it to tackle some of your important financial goals like existing debt, retirement or something else you’ve been saving for.

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This article originally appeared on GOBankingRates.com: Top 5 Mistakes People Make With Their Tax Refunds