Your federal income tax refund may be on the way to your bank account or sitting there now. Rather than use the newfound money to pay bills, boost your financial health by tackling debt and elevating your savings balances. You will become more financially secure in 2025 and coming years.
It is worth noting that due to tax relief granted following recent hurricanes, all Florida residents now have until May 1, 2025, to file their federal income tax returns. However, if you're expecting a refund, it's smart to file as soon as possible so you can put that money to work sooner rather than later.
Five Smart Ways to Slash Your Debts
- Pay Off High-Interest Debt First: Eliminating high-interest debt, particularly credit card balances, with your tax refund provides immediate financial benefits. Did you know that Americans collectively owed a record $1.21 trillion on credit cards as of late 2024? Make tackling your outstanding balances a priority. The less you owe, the more you will save in interest payments, and the sooner you pay off your card, the faster you will feel relief from that debt hanging over your head.
- Create a Debt Avalanche: This approach prioritizes debts with the highest interest rates. Directing your tax refund toward your highest-interest obligations will save the most money on interest payments over time. But that’s not the only strategy.
- Or…Use the Debt Snowball Method: Want a quick win in the battle against personal debts? Use the snowball method to pay off your smallest credit card and other open-line balances first, regardless of interest rate. After your first victory, attack the next largest debt and the next and the next until all your debts are paid off.
- Target Nearly-Paid-Off Loans: If you are down to the last two or three installment loan payments, use your tax refund to erase them. Not only will you free up cash for other purposes, but you will also have one less payment to worry about. If you have two or more similar loans, pay them off, too, for a double or triple win.
- Pay some, save some: Rather than apply the entire refund toward debts, allocate some of that to savings. Let’s say you receive an $8,000 refund. You could apply half toward your debts and deposit the other half in an emergency or health savings account (see below). A balanced approach can ease your debt load while improving your financial security for the future.
And Five Strategies to Strengthen Your Savings
- Establish or Bolster Your Emergency Fund: If you are like the millions of Americans who don’t have enough money set aside to cover unexpected expenses, put your tax refund into an emergency account. Keep three to six months of living expenses in a liquid savings account like the Easy Access or Savings Club accounts at Tropical Financial Credit Union. The money will provide a buffer against surprise medical bills, car repairs, or extended unemployment.
- Open a High-Yield Savings Account: Placing your tax refund in a high-yield savings account allows your money to earn interest while remaining immediately accessible for future needs. The higher interest rates these accounts offer than traditional savings accounts help your money grow faster. Tropical Financial offers money market accounts with a higher interest rate than traditional savings accounts.
- Invest in a Health Savings Account, or HSA: Do you have a high deductible on your healthcare plan? If so, an HSA may be right for you. It offers triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This account, which has no equivalents among other forms of savings, can cover your medical expenses today and help pay for them when you retire. Visit Tropical Financial’s website for more details.
- Contribute to a Traditional IRA or 401(k): Put your refund to work for you without paying Uncle Sam on the gains in 2026. Contribute to a tax-deferred retirement account like a Traditional IRA or employer-sponsored 401(k). This year, you can put up to $23,500 in a 401(k) and an additional $7,500 catch-up contribution if you are 50 or older or $11,250 between ages 60 and 63 if your plan allows. The IRA limits are unchanged from 2024: Age-based IRA contribution limits for 2025 remain the same as those for 2024, $7,000 under 50 and $8,000 if you are 50 or older. Double bonus: You can qualify for a tax deduction on your contributions. Learn more at the credit union’s savings account webpage.
- Invest in a Roth IRA: Why not a Traditional IRA? Because Roth IRAs offer tax-free growth and tax-free qualified withdrawals. While you cannot deduct the contributions, the returns grow tax-free and can be withdrawn entirely tax-free after age 59½ once you have held the account for at least five years. Ask a Tropical Financial banker for more details.
