Wondering what to do with tax refunds?

Doing your tax return may not be a thrilling experience, but the prospect of getting money back can be motivating. Not sure what to do with tax refunds or how to make the most of a windfall? If you overpaid on your taxes and expect to get some of it back, you might be dreaming about a fancy new gadget or a relaxing getaway in the sun. Those purchases offer a nice short-term boost, but there are other ways of using that money with a more lasting benefit.

Here are seven options to consider before spending your tax refund.

If you are saddled with loan or credit card balances, any influx of money is a perfect opportunity to lighten your load. According to a Thrivent Consumer Financial Outlook Survey*, responders noted that paying down debt was one of their top financial priorities.

• Snowball method. This approach involves finding your smallest sources of debt and paying down the balance as quickly as possible while making minimum payments on larger debt sources. This gives you a quick win and helps you gain momentum. You then can start putting all extra payments toward the next-smallest debt, creating a snowball effect.

• Avalanche method. This method involves paying down the debt with the highest interest rate first while making minimum payments on debts carrying lower rates. Over time, you will find that you aren't paying quite so much in interest costs, and you can start working on the debt with the next highest interest rate.

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Life is unpredictable—you simply don't know when a job loss or major illness will arise, potentially creating a financial crisis. That's why you should have an emergency savings fund big enough to cover your expenses for three to six months. If you have a family or lack job security, you may want an even bigger cushion.

Consider placing that money somewhere you're able to access quickly and where your deposits aren't at risk of losing value. Federally insured, high-yield bank accounts fit both criteria. Online accounts often pay a higher interest rate than brick-and-mortar banks, enabling your money to potentially grow more over time.

> Dive deeper: Emergency funds: How much should you save & where should you keep it?

Dropping a tax refund into a retirement plan can be one of the best ways to maximize dollars, particularly for younger investors. That's due to the power of compound interest. Let's hypothetically say that an investor at age 30 contributes $6,000 to their retirement account annually and receives an 8% annual rate of return. By the retirement age of 65, the money will have grown to over a million dollars, as described below:

Most 401(k) and similar employer-sponsored retirement plans don't accept lump-sum investments, but you could increase your payroll contributions and use the refund money to supplement your reduced take-home pay.

Annual limits for retirement plans are set annually by the IRS. If you are 50 or older, you also have the opportunity to make catch-up contributions as an additional boost to your savings.

401(k), 403(b) & 457(b) contribution limits:

• 2023 contribution limit: $22,500
• 2024 contribution limit: $23,000
• Catch-up limit for age 50 and older: $7,500

Traditional and Roth individual retirement accounts (IRAs) offer a way to invest outside of your employer's plan. The contribution limits are lower than employer-sponsored plans, but you have the ability to make a lump sum investment.

• 2023 contribution limit: $6,500
• 2024 contribution limit: $7,000
• Catch-up limit for age 50 and older: $1,000

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You may have savings goals outside of those of your future retirement. An alternative to think about is investing in a mutual fund or brokerage account.

You won't get the tax deferrals of a 401(k), but you still will have the potential to grow your assets by participating in the markets. It may be a smart play for someone who wants the flexibility to withdraw their funds at any time without triggering a costly penalty.

The average cost of college in the U.S. is $36,436 per student annually, including books, supplies, and daily living expenses. And if the financial strain of getting a college degree seems tough now, history suggests tuition is likely to be even higher in the years ahead.

For parents with minor children, tax refunds present a great opportunity to build a 529 education savings account.² The money you take out of it for qualified college expenses—or possibly private K-12 costs—is tax-free.³ Depending on where you live, your state may offer income tax deductions on the money you contribute as well.

> Discover all of the college savings plans available to you.

There's nothing as satisfying as lending support to those who need it most. Consider making a difference by giving at least part of your refund to a charitable organization that reflects your values. You may find it's easier to donate using a chunk of unexpected money you hadn't factored into your budget.

Financial planning is all about balancing your near-term well-being with your long-term needs. That is to say: You still can use some of your tax overage on something fun, like a new kitchen appliance or a getaway with friends, but prudence is key.

If your emergency fund needs a boost or you're not on track with your retirement contributions, you may want to set aside the majority of your refund for those higher-priority goals, but that doesn't mean you can't treat yourself. Before the refund arrives, think about the percentage that you're comfortable using today—perhaps 10% or 20%—and put the rest toward longer-range needs.

Still not sure about the best way to use your tax refund? Based on your unique circumstances and long-term goals, our financial advisors can recommend options that fit into your broader wealth management plan. Find a financial advisor near you and start on the path to greater financial freedom.