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February 7, 2013

Send Your Tax Refund to Your IRA via Direct Deposit

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by Denise Appleby

If you are due a tax refund, you can have the IRS send the amount to your IRA as an IRA contribution via direct deposit. This deposit can be made to your Traditional IRA, Roth IRA or SEP IRA as a regular IRA contribution. Special rules apply when sending your tax refund to your IRA via direct deposit. The following are some general guidelines.

Form 8888 May Be Required

If your deposit is being split among more than one account, such as between more than one IRAs or between an IRA and a regular checking and/or savings account, IRS Form 8888|Allocation of Refund (Including Savings Bond Purchases)must be filed on your behalf. This form is not required to be filed if the direct deposit is being sent to one account; instead, the account information can be provided directly on your tax return.

Contribution Limit and Eligibility

Your IRA contribution for 2015 and 2016 is limited to a dollar amount of $5,500, or $6,500 if you are at least age 50 by the end of the year.  Ensure that the amount designated to be sent to your IRA does not exceed the limit.

Reminders:

  • You must have eligible compensation for the year in order to be eligible to make regular contributions to your IRA.
  • If your eligible compensation is less than the dollar limits indicated above, your contribution is capped at the amount of compensation that you receive.
  • Regular IRA contributions cannot be made to Traditional IRAs for the year in which you reach age 70½ and later.
  • You are eligible to make contributions to Roth IRAs only if your modified adjusted gross income (MAGI) is below certain amounts. Please click here for MAGI limits.

Information and Deadline for Proper Application

Your IRA custodian will reject your direct deposit if your IRA is not opened at the time they receive thefunds, or if your account number is incorrect. Amounts rejected would be returned to the IRS, and the IRS will in turn send the amount to you in check form. As such, please ensure that your IRA is opened and that your account information is correct before your direct deposit is requested.This is especially important if you want the contribution to be applied to 2015, as the deadline for doing so is April 18, 2016.

If you want your direct deposit to be treated as a contribution for 2015, be sure to notify your IRA custodian. If they do not receive such notification from you, they will treat the amount as a contribution for 2016. They are also required to treat it as a contribution for 2016 if they receive the deposit after April 18, 2016. 

If the amount is reported on your tax return for 2015 and your IRA custodian treats it as a 2016 contribution, either because you did not inform them that is was supposed to be for 2015, or because they received it after April 18,2016, your tax return will need to be amended to remove the contribution. If they received it by April 18, 2016 and you provided proper instructions to apply it to 2015, but they erroneously applied it to 2016, contact them to have it corrected.

Work With a Competent Tax Professional

Consult with a competent tax professional regarding depositing your tax refund to your IRA. Be sure to ask your tax professional where you are eligible to claim a tax deduction for contributions to Traditional IRAs, and the savers credit for contributions to Roth and/or Traditional IRAs. These tax benefits can help to offset the cost of funding your IRAs.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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