Transferring Tax Refunds to Your IRA
The IRS is making it easier for tax payers to transfer refunds into your IRA. By Attaching Form 8888 to your tax return, you can instruct the IRS to split your refund and transfer it, in part or in full, directly into up to 3 different accounts which includes savings bank accounts, your IRA and a Coverdell Education Savings account. If you want the refund to go to a single account, then simply ill in the account details on the direct deposit line on the tax return. In this case, you won’t be needing form 8888. Compared to the traditional check in the mail, direct deposits into your account are relatively much faster.
First thing you need to know is whether the financial institution managing your IRA will accept direct deposits into the IRA. Make sure you have the correct account number and routing number. Incorrect information will send the deposit back to the IRS and the refund being subsequently sent by check.
Another important issue is the year to which the deposit is credited as a contribution. The IRS is responsible only for making the deposit. It is the manager of your IRA who will be making the decision, and it is your duty to ensure that you convey the correct contribution year. This is important because the ramifications will come to the fore only when you file the ‘next’ tax return. If the IRA gets the refund deposit in March, and your IRA manager credits it into the current year, while you take a tax deduction on the deposit for the year gone by, that will stir up a hornet’s nest, to say the least. And to clear it all up at a later date will be very messy affair. Therefore, when accepting a tax refund by direct deposit into your IRA, make sure your fund manager knows which year it goes into.
You also need to issue specific instructions regarding the investment of the refund. Please note that direct deposits of tax refunds are allowed into traditional, Roth and SEP-IRA’s. A Simple IRA is not allowed to accept direct tax refund deposits. You can check your refund status by visiting the IRS website. Nearly 4 million tax payers are requesting partial or full tax refunds via direct deposits because it’s easier and faster than a check in the mail, and it’s proving to be a valuable tool for making additional contributions to your savings.