3 Ways the Upper Middle Class Can Best Use Their Tax Refunds in 2024

Tax season is in full swing, which means tax refunds are already landing in bank accounts. Many people see their tax refunds as windfalls and use them to splurge. There’s nothing necessarily wrong with that, but it’s incorrect to view a tax refund as free money, so to speak. That refund is your money that you overpaid in taxes — essentially, you gave the government a free loan that they’re finally paying you back for.

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For upper-middle-class earners, their annual refunds are often substantial, since many aren’t able to take advantage of all of the tax breaks and shelters that the truly wealthy use. Their higher incomes also make it a little easier to justify spending those refunds on more frivolous things — but that money can be put to smarter use. GOBankingRates spoke to experts to find out three ways the upper middle class can best use their tax refunds this year.

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What Is the Upper Middle Class?

Just who exactly is the upper middle class, and why do we even need to make the distinction? With about half of U.S. adults considered middle class, there is obviously going to be a lot of variance in incomes and lifestyles, which is one reason these thinner slices can be helpful.

While there is still variation depending on location — for example, a pretax household income of $150,000 is easily enough to put you in the upper income tier in most of the country, but in the San Francisco Bay area, it only puts you in the middle — in general, you are considered upper middle class if you have an income between $80,000 to $100,000.

Check Out: Billionaires vs. the Middle Class: Who Pays More in Taxes?

Pay Down Bad Debt

Not all debt is a bad thing, especially if it’s something like a mortgage, which typically has a relatively low interest rate and is being used to purchase an appreciating asset. Debt with very high interest rates — like credit cards — is another story. Unfortunately, credit card debt is common among the middle class, and the upper middle class is no exception, with around 54% of them carrying over $7,000 in debt on average.

“If you calculate the interest you will pay over your lifetime, the number might shock you — this is wasted money. I feel strongly that you should eliminate debt every time you get a chance. While investing the money or using it as a down payment on a rental property is not the worst thing, paying off debt will generally be the better option. If you get a tax refund, pay off debt!” said Lamar Brabham, founder and CEO of financial advisory firm Noel Taylor Agency.

Build an Emergency Fund

If you’re debt-free, that’s great — your next move should be to establish an emergency fund for yourself. This is cash that you set aside to cover you in case you unexpectedly lose your income or incur a large expense. Let’s say you get laid off and it takes you a while to find a new job — your emergency fund will allow you to pay the bills while you look, instead of having to withdraw from a retirement account or take on new debt.

Cindy Scott, certified financial planner (CFP) and chartered financial consultant (ChFC) at Charles Schwab, said an emergency fund should have enough to cover at least three to six months of living expenses.

“Essential living expenses can vary depending on your situation, but typically include monthly housing costs, loan payments, food, child care, insurance, and transportation costs. In order to have fast access to emergency cash, keep it in something safe, low risk, and liquid, like interest-bearing checking accounts, money market savings accounts, money market funds, or short-term CDs,” Scott said.

Max Out Retirement Accounts

If you don’t have debt and already have savings set aside to cover your living expenses in case of an emergency, then you can put your refund toward securing your retirement. Very few people are actually hitting the maximum amount they can contribute toward their tax-advantaged retirement accounts like IRAs and 401(k) plans.

“Using those funds to max out your retirement accounts will give an extra boost to your savings that will grow with interest over time. In 2024, the maximum employee 401(k) contribution limit is $23,000 and the maximum IRA contribution is $7,500. If you are 50 or older, you are also eligible to make a $7,500 401(k) catch-up contribution and a $1,000 IRA catch-up contribution,” Scott said.

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This article originally appeared on GOBankingRates.com: 3 Ways the Upper Middle Class Can Best Use Their Tax Refunds in 2024

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