3 Smart Ways to Spend Your Retirement Tax Refund

Have you received your retirement tax refund yet? You may soon. The IRS is reporting the average tax refund is $2,548 as of mid-February. And that number includes retiree refunds.

Tax refunds may be higher for older adults because of the new "senior bonus" deduction introduced in the 2025 Trump tax bill. This tax break allows folks age 65 and older to deduct up to $6,000 per individual from taxable income. That can translate to hundreds of dollars in tax savings, depending on your income.

And if you haven't already thought of spending that money, now's a great time to do it, before those newfound funds burn a hole in your wallet. Here are three smart ways to spend your retirement tax refund and help your financial position in 2026.

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*Disclaimer: This article addresses federal tax refunds only. States may have different tax treatment of the items discussed. Consult with a tax professional when necessary.

Understanding the 2026 'senior bonus' deduction for retirees

Before we get into the smart ways to spend your retirement tax refund, it may be helpful to understand why you might be getting a bigger check. The most likely reason for this 2026 tax season is the bonus deduction for older adults.

The "senior bonus" deduction is a new tax break for adults 65 and older. The maximum tax benefit for this deduction is $12,000 if married filing jointly (and both adults qualify) or $6,000 per individual.

However, certain income limits apply.

• For instance, the deduction starts to phase out for those with modified adjusted gross income (MAGI) over $75,000 (single) or $150,000 (joint filers).
• The "senior bonus" tax deduction disappears completely for those with MAGI over $175,000 (single) or $250,000 (married joint couples).

For more information, check out Kiplinger's report, Over 65? Here's What the New $6K Senior Tax Deduction Means for Medicare IRMAA.

1. Pay off credit card debt and more in retirement

Unfortunately, debt comes for us all, and retirees are no exception. According to the National Council on Aging, many older adults have debt in retirement.

• Among nearly half of all U.S. households age 65 and older that have debt (other than a mortgage), 85% have credit card debt.
• About 1 in 4 older adults is still paying a mortgage after 65.
• Roughly 7% of older adults have unpaid medical bills.

So, why not use part of your retirement tax refund to pay the bills?

While not as much fun as a payday or shopping trip, eliminating high-interest obligations — like credit cards and personal loans — can save you hundreds in interest charges and significantly reduce financial stress in retirement.

If your retiree tax refund doesn't cover all of your debt, you might be able to negotiate a settlement with your creditors. But keep in mind that forgiven debt can have some negative financial impacts:

• Tax liabilities. The IRS generally treats forgiven debt like taxable income. For example, if a creditor reduces a $10,000 balance to $6,000, the $4,000 difference must be reported on your federal tax return.
• Prepayment penalties. Some loan agreements charge fees for early repayment.
• Credit impact. Settling a debt for less than the full amount can damage your credit score.

Before finalizing any settlements, consult with your creditor or a qualified financial advisor to understand the impact on your specific situation. Using a portion of your 2026 tax refund toward paying down debt can be a disciplined first step toward long-term financial stability.

2. Invest in the safest tax-free investment and emergency funds

While 25% of taxpayers view their refund as "free money," a smarter approach for 2026 is to treat those incoming funds as an investment opportunity.

According to a recent Empower survey, over half of all Americans plan to rely (or already rely) on personal savings and investments during retirement. Using 401(k) accounts, earnings and dividends from stocks, and individual retirement account (IRA) investments may be a vital part of your retirement plan. But it's important to balance those options with more flexible or low-risk investments.

Otherwise, you could be in for some unintended financial consequences.

For instance, a market downturn can deplete your retirement savings in an IRA if the investment options are moderate-to-high risk. Earnings and dividends from stocks invested outside of an IRA may be subject to high capital gains tax.

Plus, 401(k)s (and other tax-deferred, employer-sponsored plans) are subject to required minimum distributions (RMDs). An RMD is basically the government telling you when and how much to withdraw from your retirement savings account after a certain age.

For these reasons, using your retirement tax refund to invest in low-risk options like high-yield savings accounts or certificates of deposit (CDs) could help diversify your 2026 portfolio and bring about a few financial benefits:

• By investing outside of an IRA, you may gain more flexibility in managing annual taxable income and reduce the impacts of market volatility on your investments.
• Plus, by keeping some funds in a short-term CD, money market, or high-yield savings account, you'll be more liquid, should you have a sudden medical, home, or personal emergency.

Cash equivalents like high-yield savings and CDs are typically best used within one to five years and as part of a balanced retirement strategy. Consult with your financial advisor when appropriate.

Is there a tax-free investment? Municipal bond interest is generally considered "tax-free" at the federal level, making it a popular choice among retirees. However, municipal bond interest still counts toward Social Security benefit taxation, capital gains taxes, and can trigger Medicare Part B/D surcharges (if you earn over a certain amount).

In general, municipal bonds are best suited for retirees looking to minimize their taxes rather than maximize high growth and income.

3. Lower tax in retirement for 2026

Although tax refunds are projected to be higher on average this year, any individual refund could be low.

If your retirement tax refund was lower than expected and you want to change that for next year, you could utilize your current refund on expenses that qualify for itemized deductions.

By strategically "bunching" expenses into a single calendar year, you might exceed the standard deduction ($16,100 for singles, $32,200 for married joint couples), thereby reducing your overall tax liability for tax year 2026. (You'll use those amounts for returns typically filed in early 2027.)

Here are a few key areas you may find itemized deductions over the course of 2026 spending:

• Charitable contributions. Donating to a qualified 501(c)(3) organization remains one of the most effective ways to increase itemized deductions, though several tax changes affect charitable donations in 2026.
• Medical and dental expenses. You can deduct qualified unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). This may include procedures and retirement home improvements required for medical care.
• State and local taxes (SALT). Keep track of all your property and state income taxes paid (or sales tax, which is useful if you live in a no-income tax state). These expenses may be counted toward your federal SALT deduction cap, up to $40,400 for the 2026 tax year.

Of course, there may be more competing priorities to spend your retirement tax refund on.

Recent data indicate that the average grandparent spends $3,917 on their grandchildren each year (among those who give support). And that's not counting daily retirement expenses, like mortgages, utilities, and healthcare.

If your retirement tax refund is already earmarked for these essential expenses, maintain your current plan. However, if you have surplus funds, reinvesting them into next year's tax strategy is a smart way to preserve your wealth.

Read More

• Retirement Taxes: How All 50 States Tax Retirees
• The Rubber Duck Rule of Retirement Tax Planning
• Most-Overlooked Tax Breaks for Retirees and People Over 65
• 3 Retirement Changes to Watch in 2026: Tax Edition