Here's What Happens When You Invest Your Tax Refund

As of Feb. 16, 2024, the IRS had issued 20,883,000 tax refunds totaling $66.980 billion. These refunds are for taxes overpaid in 2023. The average refund amount going to each taxpayer so far this year is $3,207.

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That is a lot of money to get in a lump sum. The big question is, what should you do with it? And for many people, the best answer is to invest it. Here's what happens if you put this money into a brokerage account where it can grow.

The benefit of investing your refund

Investing your tax refund ensures that you won't waste the money and that the cash can go to work for you and help you grow richer over time.

Putting this money into an investment account can actually make a pretty noticeable impact on your future. The table below shows how much the average $3,207 refund could grow over time if you earn a 10% average annual return, which is the stock market's average over the past 50 years.

It may seem hard to believe that you could end up over halfway to $100,000 just by taking this year's return, investing it, and leaving it alone for three decades. But that's exactly what can happen thanks to the power of compound growth. After your money is in the market and it begins earning returns, those returns can be reinvested and your funds grow exponentially.

Here's what happens if you invest your tax refund every year

Investing this year's refund alone could make a big impact on your net worth over time. But what if you invested your refund every year?

It's hard to predict exactly how much your refund will be over many decades, as your income and tax policy could change. But let's assume for the sake of simplicity that you got the exact same $3,207 average refund for the foreseeable future. The table below shows what investing that refund every year could do for you, assuming a 10% average annual return.

Investing just your annual refund could give you a net worth that puts you well on your way toward financial security.

Should you invest your tax refund?

As you can see, there are big financial benefits to putting your tax refund into an investment account. And for many people, it can be the right choice.

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However, you do want to make sure you've paid off high interest debt (like that on credit cards) first, because the return on investment you'll get from saved interest on this kind of costly debt can be higher than returns you can earn by investing.

You'll also want to be sure you have a fully funded emergency fund, because otherwise you could end up in debt or having to sell investments at a bad time if something goes wrong.

If you have expensive debt or no emergency fund, using your tax refund to fix these issues is probably a better bet. If that's not your situation, though, funneling those funds into an investment account could just end up being the best decision you ever make.