Unless you file for an extension, your 2025 Income Tax Return is due on April 15, 2026. And, if you are getting a refund, you want to file as soon as you can. We wrote about this earlier with our 7 Practical Steps to File Your 2025 Income Tax Return.
The Internal Revenue Service (IRS) is now issuing refunds electronically by default, typically by direct deposit. Paper refund checks are being phased out. Therefore, if you are expecting a refund this year, having a plan before it hits your bank account will make a difference in your finances.
Although everyone’s situation is clearly different, and priorities will vary, we have laid these out in sequence of how households and individuals should think about what they will be doing with their tax refund.
Who is this for?
This post is for individuals and families who are receiving a tax refund and want to use it intentionally.
1) Fund a Roth IRA
All taxpayers should consider funding a Roth IRA. In 2025, the maximum Roth IRA contribution is $7,000. If you are aged 50 or older, you can make a catch-up contribution of $1,000 for a total of $8,000.
Second, higher income taxpayers are not eligible for a Roth IRA contribution. In 2025, for single people, they can contribute if their Modified Adjusted Gross Income (MAGI) is under $150,000. There is no contribution allowed when their MAGI is $165,000 or higher. A partial contribution is allowed when MAGI is between these amounts. For a married couple filing jointly, they can contribute when their MAGI is under $236,000. There is no contribution allowed when their MAGI is $246,000 or higher. Similarly, a partial contribution is allowed when MAGI is between these amounts. These phaseout amounts are indexed to inflation annually.
If you are not eligible to contribute to the Roth IRA based on your income, you may want to consider a backdoor Roth IRA conversion which allows higher-income earners to fund a Roth IRA indirectly. Here is a post we wrote on Practical Steps to Fund a Backdoor Roth Conversion.
If you are eligible, you have until April 15, 2026, to fund your 2025 Roth IRA.
Income Taxes
Why Roth IRAs are Different at Retirement
Unlike the Traditional IRA, there is no income tax deduction with the Roth IRA. However, there is a significant difference between the backend. When taxpayers turn 73, they must begin to take out their Required Minimum Distribution (RMD) from their Traditional IRA and 401(k) plan if they have one. This percentage starts at roughly 4% of the market value from the prior December 31. This percentage goes up every year as is it derived from a life expectancy table. These distributions are taxed as ordinary income.
If the Roth IRA meets two simple criteria, any withdrawals are tax-free, not tax-deferred like the traditional IRA. Those criteria are, the Roth IRA account must be opened for at least five years, and the taxpayer must be over age 59 ½. If you meet these two criteria then:
All the Distributions are Tax-Free!
Why Tax-Free Matters In Retirement
To understand the difference between tax-deferred and tax-free and why that matters over decades, see our post on The Difference Between Tax-Deferred and Tax-Free Investing.
If you want to review why a Roth IRA is such a powerful long-term tool, read our post 3 Easy Reasons to Open a Roth IRA.
There are four keys here. First, you can only contribute $7,000 (or $8,000 if you are aged 50 and older) a year. Once the year is over, in this case up to the due date of the return, April 15, that is it. The window closes. You cannot make up for it in the following year.
Second, although we do not recommend it, you can withdraw your contributions any time. Any withdrawals of just your contributions would not be subject to income tax or any penalty.
Third, the Roth IRA is not subject to the Required Minimum Distribution (RMD) rules like a traditional IRA is. Not being subject to the RMD rules applies during the Roth IRA owner’s lifetime and surviving spouse’s lifetime. This means that the investment runway gets longer as there is no requirement for the RMD.
However, non-spousal beneficiaries like children and grandchildren will be subject to the RMD rules. For inherited Roth IRAs this means the child or grandchildren must drain the Roth IRA within 10 years.
Fourth, when you do retire, you should have at least three forms of taxable ordinary income. This includes your 401(k) plan, traditional IRA, and Social Security benefits. The 401(k) plan and traditional IRA will all be taxable as ordinary income. Up to 85% of your Social Security benefits could be taxable as ordinary income. When planning for your Social Security benefits caution needs to be exercised, we wrote about it here in 3 Practical Reasons for Your Coming Social Security Haircut.
If you are fortunate to get a pension, first, be grateful. You are in the minority of folks now receiving a pension. Second, this will also be taxable as ordinary income.
That is why having a Roth IRA in retirement is so valuable. If the distributions are qualified with the account being open for at least 5 years and you being over age 59 ½, then all the distributions are tax-free.
2) Increase Your Cash Reserve Fund
Everyone needs to maintain a cash reserve fund. This should be in a liquid investment that you can access immediately. These tools tend to be high yield savings accounts or money markets.
Many commentators suggest having 3-6 months of living expenses in your cash reserve fund. Our observation is that most folks, particularly younger ones, have nowhere near that amount.
That is fine. Just start where you are and go forward from there. Figure out how you can add some money to your cash reserve fund every month. For example, if your monthly expenses are $7,000 a month, a starter goal would be $14,000 – $21,000 even though you are not there yet.
The reason you need a cash reserve fund is, for well, stuff happens. It could be your furnace breaking down, a major car repair bill or an unexpected large medical bill. This is where your cash reserve fund will come in. You will have the cash to pay for this stuff when it does happen.
Having the cash to pay for these expenses is huge. If you can pay for these expenses with cash, you do not have to put it on your credit card.
3) Reduce High-Interest Rate Debt
High-interest rate debt tends to be credit cards and personal loans. The average credit card interest rate is 25% and the average personal loan is 12%. For example, at a 25% interest rate a credit card with a $10,000 balance costs $2,500 annually in just interest. Both have high interest rates in the current environment. 1) 2)
One of the things that you will need to do is get a handle on your high-interest rate debt. Having high-interest debt may mean that you are spending more than your income can currently support.
This means you will need to put pencil to paper and review your spending plan. Read on here when we wrote about, Goodbye to the Joneses. 3 Practical Steps to Arrive Financially.
Conclusion
If you would like help with 3 Practical Things to do With Your Tax Refund or how these ideas fit into your financial plan, please call Thomas F. Scanlon, CFP®, CPA at (860) 645 1515 or E-Mail Thomas.scanlon@raymondjames.com
This is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA.
1)forbes.com – February 23, 2026
2) bankrate.com- January 6, 2026
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax filing status, and other factors. Withdrawal of pre-tax contributions and / or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a10% federal tax penalty.
Like traditional IRA’s, contribution limits may apply to Roth IRA. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.