3 Ways to Fund a Retirement Account with Your Tax Refund

Estimated reading time: 2 minutes, 33 seconds

Even though we’re a month or so from Tax Day 2018, many have already completed their tax returns. Those who’ve already received refunds from the IRS may even be debating what to do with the extra cash. Perhaps they will pay down debt. Perhaps, with Spring arriving in a few weeks, they will purchase a new mower. Some may deposit all or part of the refund in a savings account. What about funding a retirement account with your tax refund?

Actually, you could use all or part of your tax refund to contribute to a tax-advantaged retirement account.

tax refund

However, whether you should use a refund for this purpose is up to you and your team of professionals. But if you decide to use your refund in this fashion, the IRS makes it quite easy to do so.

  1. Make a contribution via IRS Form 8888: While you can’t contribute to a SIMPLE IRA this way, you can contribute to a Traditional, Roth or SEP IRA via Form 8888. You may also use Form 8888 for contributions into a Coverdell Education Savings Account (ESA) or Health Savings Account (HSA). However, you must deposit the refund into two or three accounts, such as one Roth IRA and one ESA. Also, the accounts to be funded in this fashion must already be established.
  2. Direct deposit into a retirement account: If you’d rather not spread the refund over two or three accounts, you can have your refund (or part of it) directly deposited into an account of your choice. Most individual taxpayers assume this is only for a personal checking or savings account, but you can also deposit directly into an already-established Traditional, Roth or SEP IRA.
  3. Manual deposit into a retirement account: You may also consider having the refund sent to you and then fund an account via a deposit of all or part of the refund amount. This process would be no different than were you to withdraw money from another source to deposit into a retirement account.

And if you choose to use your refund for a retirement contribution, you could receive tax benefits as a result.

Retirement accounts and taxes go hand-in-hand. Retirement account holders receive various tax advantages for making contributions to those accounts. Depending on the type of account, those advantages could include tax deferrals, tax deductions and tax-free qualified distributions. In addition, low- and moderate-income workers who contribute to a retirement plan can currently claim the Retirement Savings Contribution Credit (or Saver’s Credit).

So, what’s best for your individual situation? Is it saving for your future in a tax-advantaged account? What about spending the refund on a much-needed vacation or upgrades to your home or property? Does your rainy day fund need more attention, or do you need to pay down a large credit card balance?

For many, what to do with a tax refund is a tough decision. But know you have multiple options should you consider to use your refund to contribute to a retirement account. Consult with your tax professional to determine if funding a retirement account with this sudden influx of cash is right for you.

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