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Wealth Blog

Use your tax refund to fund an IRA in 5 easy steps

By - Last modified: January 23, 2013 at 10:03 AM

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Finding money throughout the year to set aside for retirement savings isn’t always easy. But did you know you can choose to have your tax refund directly deposited into an IRA or Roth IRA of your choosing?

It can also be split among multiple accounts.

That’s right: The tax refund can be used to directly fund an IRA up to the annual contribution limit.

In 2012, the contribution limit is $5,000 ($6,000 for individuals 50 or older), but grows to $5,500 ($6,500 for individuals 50 or over) for the 2013 filing year.

Here are the 5 steps:

1. It is tax time! Prepare your tax return for the year.

2. Determine the refund amount. Once you know how big your refund will be, decide how much you would like to contribute to your IRA or Roth IRA (up to the maximum annual contribution allowed).

3. One, two or three? A refund going to only one account can be designated directly on IRS Form 1040. Prepare IRS Form 8888 to direct the refund to multiple accounts (up to three).

4. Use caution. If you use Form 8888, pay attention to the six areas of caution called out in the instructions to ensure that you qualify and that you are properly filling out the form. You can download the form here from the IRS website.

5. Check your work and follow-up. If the IRA deposit is meant to be for the previous tax year, make sure the institutions code it that way and that it is received by the deadline. If the refund amount is adjusted for math errors or tax adjustments, check which accounts on the form are affected (you may need to do an amended return if the IRA deposit is adjusted). Refund offsets can be done against any accounts receiving the refund (again, you may need to do an amended return). If the funds go into the wrong account, follow the institution to get the funds credited to the correct account.

That’s it, a simple way to ensure you start, or end, the tax year on a positive note. As I always say, “it is best to pay yourself first.” This is one sure-fire method to accomplish that goal.

 

Write to the Editorial Department at editorial@cpbj.com

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