3 smart ways to use your tax refund right now

At this time of the year, a tax refund can be a huge relief for taxpayers who are looking for a windfall of cash to improve their financial situation. According to the IRS' most recent report on this year's tax season, the average tax refund was $3,116. That's more than enough money to make a move that boosts your financial well-being. 

However, deciding exactly what you should do with that money takes some planning. You'll want to spend some time looking over the main aspects of your finances, taking into account how much debt you owe, what types of debt you have, and what your assets look like. Be sure to note what your debt interest rates are, too. 

Once you have a good sense of your financial health, you can start to identify areas where your tax refund can provide the most help. And, if you're like most consumers, you'll probably have multiple areas where you could see your money going. To help make sense of which moves are best for you, we spoke with a trio of experts who identified three wise things to do with your tax refund today.

See how much interest you could earn by depositing your refund into a top CD account here.

3 smart ways to use your tax refund right now

Here are three ways you should consider using your tax refund now:

Deposit it into a long-term CD

Putting your tax refund into a long-term certificate of deposit (CD) (terms of more than one year) offers two considerable advantages right now. First, you get the benefit of high CD rates — it's relatively easy to secure a rate of 4.16% on an 18-month CD and 4.15% on a 2-year or 3-year CD. Second, locking in a rate above 4% is a smart move considering some economic experts believe that the Federal Reserve will cut rates later this year, which might result in banks lowering the rate they're willing to pay for long-term CDs. Since CDs have a fixed rate — it doesn't change during your account's term — any rate changes that impact the CD market won't impact the rate on a CD you open today. 

Not only is your interest rate locked in when you open a CD, but your earnings are guaranteed, too. That type of certainty is a valuable thing to have amid today's uncertain interest rate environment, and it can pay solid returns over time. For example, depositing a $5,000 tax refund into a 2-year CD at 4.15% could generate more than $400 in returns upon maturity. 

Secure a top rate for a long-term CD today.

Pay down high-rate credit card debt

Another smart way to use your tax refund is to pay down your high-interest credit card debt.  

While paying down credit card debt may not seem as exciting as putting your refund in an interest-earning CD or high-yield savings account, the math still makes sense when you compare the interest you're paying on your credit card now versus the interest you earn from a deposit account, says Bobbi Rebell, a personal finance expert at CardRates.com. 

"A high-interest credit card is likely costing you at least 20% in interest," Rebell says. "The average CD or high-yield savings account is likely going to earn you less than 5%. You will get more bang for your refund bucks by paying down the extremely expensive debt on your credit cards."

Paying down your debt comes with other benefits, too. Lowering a balance will improve your credit utilization ratio (your card balance compared to your credit limit), which could improve your credit score noticeably if your balance falls below 30% of your credit limit. As your credit score increases, you'll likely get better terms for future borrowing, which saves money in the long run. 

In the context of today's credit debt landscape, using your refund to pay down high-interest debt can help you make progress in an area that's straining the average cardholder's finances. Consumers have a record $1.2 trillion in credit card debt right now, the average interest rate of 21.91% is near all-time highs, and the number of consumers who are at least 90 days late on a credit card payment has increased year-over-year.

Get help with your high-rate credit card debt here.

Put it into a high-yield savings account

A high-yield savings account is a great fit for your tax refund if you don't have an emergency fund built up, says Miranda Reiter, Ph.D., an assistant professor in Texas Tech University's School of Financial Planning. 

"If consumers are debating between putting [their refund] into a CD or high-yield savings account or using it to pay down debt, I would offer the following advice," she says. "First, consider your rainy day or emergency fund. Do you have enough money saved for the once-in-a-while expenses that are bound to pop up at any given time? Think of the money you might need to pay for an unexpected car or medical expense or for a family emergency."

If you have an ample emergency fund, high-yield savings accounts can still be a great place to put your money. Like CDs, it's relatively easy to find a high-yield savings account with an interest rate above 4%. Additionally, depositing your refund into one of these accounts can help build long-term savings that you don't use for emergencies but that can help tide you over if you're facing extended periods of lost or reduced income, Reiter says. 

"Consider the long-term saving funds that you might need if you unexpectedly lost your job or had to take disability leave from work, which does not always pay at 100%," she says. 

A hybrid approach to using your tax refund can work too — split your money between savings and paying down debt, says Severine Bryan, DBA, founder of financial education and coaching company Sev Talks Money. And don't forget to reward yourself for your smart financial decisions, she notes.

"If they are current with their bills, have very little or low interest debt, and no emergency savings, I might advise them to put most of it towards savings, some to debt, and a smaller portion to a treat like a nice dinner," Bryan says. 

The bottom line

Today's unique economy offers multiple attractive options for taxpayers looking to strategically use their tax refund. CD and high-yield savings account rates remain high, while credit card interest rates are near historic highs, too. Therefore, using your tax refund to earn a guaranteed return through a CD or bolster your emergency fund or long-term savings (and earn interest) through a high-yield savings account makes sense right now. And, if you have credit card debt, chopping down a high-interest balance can save money on interest payments and improve your credit score, possibly leading to better credit offers in the future.