It doesn't provide the instant gratification of splurging, but it's a long-term strategy: consumers should opt to save or invest their tax refund instead of spending it on items that only depreciate in value.
Start With Your Roth IRA
Allocate the extra money toward your Roth IRA, which is the “single best savings vehicle available to American taxpayers,” said Charles Sizemore, a registered investment advisor with Sizemore Capital in Dallas and a portfolio manager on Covestor, the online investing company. A Roth IRA is one of the best options for Millennials and Gen X-ers, because even though contributions will not reduce their tax liability now, the money grows and comes out tax free later in life when they're likely to be making more money and in a higher tax bracket.
Depending on your income in 2015, you can contribute up to $5,500 or $6,500 if you are 50 or older in a Roth IRA. With the average tax refund yielding $3,000, investors who put that amount toward an IRA or Roth IRA will have reached about half of the annual contribution limit, giving them a head start on their retirement savings for the year.
ReKeithen D. Miller, a certified financial planner for Palisades Hudson Financial Group in Atlanta, recommends investing allocating your Roth IRA money in a low-cost index fund or a target-date retirement fund.
The tax break from a traditional IRA provides fewer benefits for people who make a modest income currently or are just starting out in their careers, putting them in the 15% tax bracket, Sizemore said.