Here's How Much You Could Make If You Invest Your Tax Refund Into This Growth Stock ETF Every Year

Tax season is here, and for many people, that means tax refunds. While it can be tempting to splurge on a big expense or use the money to travel, you may want to consider putting your tax refund into your savings. If you do so every year, it can help put you in an excellent position for retirement, even if you can't afford to regularly save otherwise.

Below, I'll show you just how much you could end up with in your portfolio if you were to invest your tax refund every year.

Why you should consider investing your tax refund

Your taxes will vary year to year, but for the last filing season (2022), the average refund was $2,753. In the two years prior to that, the average was $3,012 (2021) and $2,865 (2020). That averages out to $2,877 over the past three years, and that's the amount I'll use for my example.

If you can't typically find room in your budget to save money and invest, your tax return can a solution. Investing a $2,877 lump sum is equivalent to setting aside approximately $240 per month. As you'll see below, the end result could be a much more comfortable retirement.

How large can a portfolio built on tax refunds get?

Even if you have a tax refund available to invest, you may struggle with not knowing where to put that money. A simple solution is an exchange-traded fund (ETF). A growth-oriented investment such as the Vanguard Growth Index Fund (VUG 1.82%) can be an especially attractive option.

This ETF holds over 200 stocks with a low expense ratio (0.04%), and it gives investors a piece of many of the top growth stocks in the world, including Apple, Amazon, Tesla, and many others.

A fund like that can help position you for above-average returns. Over the past 10 years, the fund has generated a total return (including dividends) of 309%. That averages out to a compound annual growth rate of 15.1%.

If you were to average a return of 15% per year and start at age 35, here's how large your portfolio balance could end up growing by investing the average tax refund on an annual basis.

Calculations by author.

Through the power of compounding, you could be well up to over $1.4 million by the time you near retirement. Your ultimate returns may not be as high as 15%, but investing your annual tax refund can still help put you in a solid financial position by the time you retire.

If you can afford to invest your tax refund, do it

Due to your personal circumstances, it may not be possible to invest all of your tax refund year in and year out. That's okay -- diverting just part of your refund is still a great start.

It's often easier for people to pull from this annual payment than to try to find room in their budget every month to invest, and that's ultimately the appeal of this strategy. Simplify the process further by choosing a low-cost, diversified ETF like Vanguard Growth Index Fund, and you can be well on the way to reaching your long-term financial goals.