Here's the average tax refund for 2022, and where you should put yours to grow

Filing taxes may not be the most enjoyable financial task, but for millions of Americans, they anticipate receiving a sizeable refund from Uncle Sam. In fact, nearly 9 million Americans have already been issued a refund this tax season, totaling over $20 billion given back to taxpayers, according to the IRS. But what should you do with your tax refund?

Many financial professionals would first suggest to put it towards any high-interest debt such as credit cards or personal loans. Next, you may consider filling your emergency fund with an appropriate amount of savings. And if you have those bases covered, the next step can help you grow your retirement nest egg with a very simple strategy — opening and investing in a traditional or Roth IRA.

Select details how you can quickly take your tax refund and grow it through the power of compound interest and investing in the stock market.

According to the IRS, this year's average tax refund so far is $2,323. However, that number is expected to change as the remaining weeks of tax season go on. This time last year, the average refund was $1,900. However, last year's tax season started one month later due to the pandemic.

And by using the right online tax software such as TurboTax or H&R Block, it can help you securely file your taxes and maximize your deductions to give you the best refund possible.

First, it's recommended that you use your refund to pay off any high interest debt, such as credit card debt. If that's taken care of, consider filling up your emergency fund. By doing this, you ensure you're paying down any debt that is bombarding you with interest and are protecting yourself in case of an unforeseen event, such as job loss or illness.

But if your debt and emergency funds are taken care of, a tax refund of that size can help you make solid progress filling your traditional or Roth IRA account — and getting you one step closer to retirement.

How Roth IRAs work

A Roth IRA is a tax-advantaged account where Americans can save for retirement outside of an employer-sponsored 401(k). And within a Roth IRA, you can invest in individual stocks, ETFs or index funds to put your money to work.

When you deposit money within a Roth IRA, the money goes in post-tax. This is different than a traditional IRA or 401(k) as money goes in pre-tax. However, once the funds are invested in a Roth IRA, it grows and compounds over time, and can be withdrawn tax-free when you reach 59 and a half years old.

This is a powerful wealth builder as you can allow your money to grow over time, and not need to worry about any tax-implications once you withdraw on the account.

You can deposit up to $6,000 in a Roth IRA in 2022, while people over age 50 are allowed to contribute an additional $1,000. You have until mid-April of 2023 to fulfill those limits.

However, not everyone can contribute to a Roth IRA. In 2022, you can contribute the full $6,000 as long as you're modified adjusted gross income (MAGI) is $129,000 or less. You can make partial contributions to a Roth IRA if your modified adjusted gross income (MAGI) is between $129,000 and $144,000.

The married couples filing together contribution limits are $204,000 and $214,000, respectively.

The financial power of Roth IRAs

Roth IRAs have become wildly popular in recent years because of their tax advantages and ease of growing wealth, especially among younger people. Generation Z investors with Roth IRA accounts through Fidelity grew 146% in Q4 2021 alone, for a total of 12.3 million IRA accounts encompassing all customers, according to a recent statement from Fidelity Investments.

And this popularity is due to one simple factor: the ability to grow your money with no tax implications.

For example, if you open a Roth IRA today and deposit the full $6,000 into a simple index fund and don't touch it for 30 years, it can grow to over $45,000 at a modest 7% annual growth rate. That's because your money continues to grow as the stock market continues to grow, and you collect dividends along the way.

The press release from Fidelity also noted the average annual IRA contribution has fluctuated between $4,100 and $4,400 since 2010. Let's say you that each year since 2010 you had deposited the lowest amount ($4,100) into a Roth IRA — putting that money into an index fund and never touching it. Your account would now be worth $74,400, assuming 7% annual growth. This means your $45,100 total investment gained $25,200 in value in 11 years — a 64% return on investment with no tax penalties.

And lastly, if you max out a Roth IRA ($6,000 per year) from 18 years old to 59 and a half (41.5 years), you'll have $1.4 million at 7% growth. And while this sounds like a lottery chance, there were a reported 307,000 IRA millionaires last year by Fidelity.

So whether you contribute some or completely max out your Roth IRA, it's a great investment account to save for retirement and grow your net worth.

Best IRA providers

Roth IRAs are readily available, and free to open. They only take about 5 minutes to set up, and all you need to provide is some personal information. However, it's important to choose a brokerage that best fits your needs.

If you want a more hands-off approach, it's possible to choose a robo-advisor like Wealthfront or Betterment that will create a portfolio for you based on your age, risk tolerance and retirement horizon. If you prefer to curate your own portfolio, a more traditional brokerage like Vanguard or Fidelity will suffice.

Here are some of our favorite Roth IRA brokerages:

A tax refund is a nice bonus for millions of Americans, but rather than spending it frivolously, it can be used to get you ahead. Whether its paying down debt or funding your IRA, it's a great opportunity to use a "bonus" to get ahead financially and put yourself in a better financial position.

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Correction: The headline of this article has been updated to say the average tax refund, not the average tax return.