Saturday, April 07, 2007

DIRECT DEPOSIT OF REFUNDS TO IRA ACCOUNTS

This filing season is the first time that taxpayers are allowed to direct that their tax refunds be deposited directly to an IRA (among other qualified savings accounts). The Form 1040 allows direction to one account and Form 8888 allows direction to up to three accounts. This saves the taxpayer from having to write a check or otherwise fund an IRA contribution.

IRA contributions must be completed by April 17, 2007 (regardless of whether the taxpayer has an extension to file his or her income tax return) if a taxpayer wants the contribution to be counted for the 2006 tax year. While it appears that for taxpayers that have not yet filed yet that they still have 10 days to file and get a contribution in for 2006, this is not the case. The tax refund must be actually processed by the IRS and paid out to the IRS by April 17, 2007, which is highly unlikely for returns filed at this late date, even for electronic filers.

However, such direct deposits can be made from 2006 tax refunds for 2007 contributions. Care is still needed - the direct deposit amounts must be limited to the IRA contribution dollar limits applicable to the taxpayer. Contributions beyond the limits can result in penalties. Taxpayers also need to make sure the designated IRA account is open when the tax return is filed so that the IRS can do the direct deposit.
Post a Comment