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Ramping up your emergency cash fund or IRA with your tax refund is a better option than spending it on a new smartphone or vacation.

Three out of four taxpayers received a refund of $3,000 in 2015. Although many consumers look forward to this windfall each year, it is not a “cause for celebration,” said Joe Jennings, a wealth director for PNC, a Pittsburgh-based financial institution.

“If you are receiving a large refund check, it actually means that you have loaned money to the government throughout the year and the next year the government is paying you back without interest,” he said.

Adjusting your withholdings is a good strategy if your refund exceeds $1,000. Changing the number of exemptions on your W-4 means you will net more income from each paycheck., a North Palm Beach, Fla.-based financial content company, found that 31% of Americans who receive a tax refund this year plan to save or invest it. The survey revealed that 28% will use the funds to pay down debt, 27% will spend it on necessities like food/utility bills and 6% will splurge with a shopping spree or vacation.

Some consumers view the refund as a method of forcing them to save money each year or a way to pay down existing debt such as credit card balances with high interest.

Pay Off Existing Debt

Use your refund check to pay off as much as your credit card or student loan debt as possible since the amount of interest you are paying each month adds up quickly, said Jonathan Bochese, director of resolution services for Tax Defense Network, LLC, a Jacksonville, Fla.-based tax resolution company.

“The best use for any tax refund is to use it to pay off high interest revolving debts,” he said.

With the current low interest rate environment in money market funds and CDs, paying down debt is a no-brainer.

“If you can only make 3% on your investment and your debt is at a higher rate, pay off the debt,” said Carl Sera, a portfolio manager with Covestor, the online investing marketplace and managing principal of Sera Capital Management, a registered investment advisor in Annapolis, Md. “Don’t make it a habit to receive a tax refund, because it is money you have lent the taxing authority at a zero interest rate.”

Homeowners who do not have any other debt should pay down their mortgage by making an extra payment or two instead of stashing the refund in a savings account that is only receiving minimal interest, said David Reiss, a law professor at Brooklyn Law School. 

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“By doing so, you are making the equivalent of a pre-tax return of the interest rate on your mortgage,” he said. “If your mortgage has a 5% interest rate and your savings account has a 0.1% interest rate that is like getting a 4.9% higher rate of interest without taking any risk at all.”

Boost Emergency Fund

Bolster your rainy day fund in case you become ill or your car needs a new battery. An emergency fund totaling six months of your expenses should be set aside in a savings account, said Bochese.

“If you don’t have an emergency account or you don’t have enough saved, a large refund can get you closer to this goal,” he said.

Skip the brick-and-mortar banks if you want to beef up your emergency cash. Online banks offer much higher interest rates than traditional banks. Instead of receiving the “paltry 0.01% interest rates offered at many traditional banks, some online banks offer rates that are 100 times higher at 1%,” said ReKeithen Miller, a certified financial planner with Palisades Hudson Financial Group, a Scarsdale, N.Y. company.

Investing in Retirement Account

Increase your retirement savings by investing the refund in an IRA or 401(k), which are both tax free accounts. Since 1950, the average annual return on the S&P 500, a benchmark index, has been over 11%, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa. In 15 years, a $3,000 initial investment at 11% would generate $14,354.

“In 30 years it would have grown to $68,677 and that is exactly why compound interest has been referred to as the eighth wonder of the world,” he said. “Let's say you found a great investment like Berkshire Hathaway, a company which has had a compound annual return of 19.2% since its inception. That $3,000 would grow to $41,800 in 15 years and in 30 years it would increase to a whopping $582,600.”

Since the average refund yields $3,000, allocating that amount toward an IRA or Roth IRA means an investor will have reached more than half of the contribution limit for the year, which is $5,500. This gives consumers a head start on their retirement savings for 2016.

Socking away the money in a health savings account, or HSA, if you have a health insurance plan that has a high deductible also lowers your taxable income. The contributions are not subject to federal income taxes and can be invested like an IRA. The maximum amount is $3,350 for an individual and the advantage is that the unused funds roll over each year and any remaining money can be used for retirement after the age of 65.

Investing in an IRA or 401(k) helps lower your tax bill for 2016, said Matt Armstrong, a financial advisor for Savant Capital Management, a Rockford, Ill.-based wealth management firm.

Aim to contribute at least 10% of your salary to your 401(k), especially if your employer matches the contributions, said John Jordan, an executive at Bank of America, the Charlotte, N.C.-based financial institution.