Direct Deposit Your Tax Refund Into Retirement Savings

&l;p&g;&l;!–donotpaginate–&g; Last year, three out of four tax filers got refunds from the IRS, averaging $2,782, as of 3rd quarter ($2,895 by year-end). Where did all that money go? American taxpayers report using their refunds primarily to pay down debt, build up rainy day bank accounts and make big purchases. But there&a;rsquo;s another option: deposit your refund directly into an individual retirement account.

&a;ldquo;I have to remind people: &a;lsquo;Try to get it into retirement savings,&a;rsquo;&a;rdquo; says Craig Smalley, an enrolled agent in Orlando, Fla. &a;ldquo;It&a;rsquo;s something you have to really take advantage of, and the tax code is allowing you to do it. So, why not?&a;rdquo; In one case, a new client had been taking his refund and applying it to next year&a;rsquo;s taxes year after year. This year Smalley says he plans to direct money into an IRA and a health savings account, and he&a;rsquo;ll still get a refund to boot. Really, the only time it makes sense to apply your tax refund towards future taxes is if you owe quarterly estimated taxes on April 15 , Smalley notes.

&l;img class=&q;dam-image shutterstock size-large wp-image-786010789&q; src=&q;×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock

To direct your whole refund into a single IRA, use the direct deposit line on Forms 1040, 1040A or 1040EZ. You&a;rsquo;ll need the IRA&a;rsquo;s routing and account numbers. Double check them with your IRA provider. Fidelity, for example, explains &l;a href=&q;; target=&q;_blank&q;&g;here&l;/a&g; how to adjust Fidelity account numbers on IRS forms and warns that deposits in 2018 will default to a deposit for the 2018 tax year unless you call in to designate it as a deposit for the 2017 tax year.

You can direct all&a;mdash;or part&a;mdash;of your refund into a traditional IRA, a Roth IRA or a SEP-IRA (but not a SIMPLE IRA). If you want to split your refund—say putting part into your IRA, part into your spouse&a;rsquo;s IRA, and part into a checking account— use Form 8888. Fortunately, tax software makes filling it in easy. If you use Form 8888, that gives you an additional savings option: you can buy up to $5,000 in series I savings bonds electronically, and they go by direct deposit into your TreasuryDirect account.

You can direct your refund to a health savings account, too. &a;ldquo;Retirees usually take money out of an IRA or 401(k) to pay for healthcare and have to pay tax,&a;rdquo; says Smalley. &a;ldquo;If you use an HSA, you never have to pay tax.&a;rdquo;

Want your refund to count as a 2017 IRA contribution? Then it must be deposited into your IRA by April 17&l;sup&g;th&l;/sup&g;, 2018. So, file your tax return electronically and as early as possible—ideally by mid-March.

Tip: If you&a;rsquo;re worried you might need some of the refund for an emergency, use a Roth IRA. In a crunch, you can take back your original contribution without paying taxes or penalties. And if you don&a;rsquo;t need the cash, it will grow tax free for retirement.

What if you owe the IRS? Then, run the numbers to see if you fund a traditional deductible IRA how you can come out ahead by saving for retirement. &a;ldquo;I&a;rsquo;ll create a spreadsheet and show them exactly how much money they can put into an IRA to bring their income tax liability down to zero,&a;rdquo; Smalley says.

&l;strong&g;See also:&l;/strong&g;

&l;a href=&q;;&g;IRS Announces 2018 Retirement Plan Limits For 401(k)s And More&l;/a&g;&l;/p&g;