Directing your tax refund to your IRA
by William G. Lako, Jr.
March 28, 2014 12:37 AM | 2115 views | 0 0 comments | 56 56 recommendations | email to a friend | print
More than 31 million Americans have one tax form they don’t mind completing: Form 8888, Allocation of Refund. If you will be receiving a refund this tax season, the IRS offers you several options. You can request a paper check in the mail; you can buy up to $5,000 in U.S. Series I Savings Bonds; or you can specify your refund be directly deposited in up to three different accounts with up to three different U.S. financial institutions.

If you want to direct deposit your federal tax refund into one account, you can use the direct deposit lines on Forms 1040, 1040A or 1040EZ. If you want to split your refund among different accounts, you’ll have to use Form 8888.

Your financial institution must allow for direct deposit to your account, and your direct deposit amount must at least be one dollar. Before you fill Form 8888 with your routing numbers, you should confirm your financial institution will accept a joint refund into an individual account. You cannot direct your refund to someone else’s account, but generally, your spouse’s account is an exception for a joint refund.

The good news, however, is that you’re not limited to your checking account. You may be able to direct your refund to your savings account, an IRA, a health savings account, an Archer MSA or a Coverdell education savings account.

If you are looking for an easy way to make an IRA contribution, consider directing your refund to your IRA. Federal tax refunds will not indicate a contribution year, so as the IRA account owner, you are responsible for notifying your IRA trustee of the year for which the deposit is intended. You are also responsible for making sure your contribution does not exceed your annual limit. You may want to confirm with your financial institution whether they will accept a direct deposit for a prior year IRA.

Additionally, if you want your refund to be considered as a prior year IRA contribution, the direct deposit must be made to your account by the due date of your return without regard to extensions. You should be aware the IRS is not responsible for the timeliness of the direct deposit; therefore, if the deposit is not made by the deadline, the deposit is not a contribution for that year. You then may need to file an amended return and reduce any IRA deduction and any retirement savings contributions credit you claimed.

If the IRS finds a mistake on your return that affects the amount of your refund, they will adjust the amount deposited to the last account you designated. You should receive a letter from IRS explaining the errors and the adjustments to your return, your refund amount, and direct deposit(s).

Most important of all, make sure you provide the correct account and routing numbers to the IRS, as the IRS assumes no responsibility for your errors. If the account number does not pass the IRS’ validation check, IRS will send you a paper check for the entire refund. However, if you were to incorrectly enter a routing number that belongs to someone else and your financial institution accepts the deposit, you must work directly with the financial institution to recover your funds.

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