IRA Tax Refund Deposits
In some cases, taxpayers can have direct deposit tax refunds distributed directly to their IRA accounts. Learn more about this option below.
Taxpayers who use direct deposit for their federal refunds can divide their refunds and make deposits into a maximum of three financial accounts including IRA accounts (Traditional, Roth and SEPs, but not SIMPLEs).
The split-refund program allows taxpayers to conveniently designate – at the time they file – and deposit their refunds with any U.S. financial institution as long as they provide valid routing and account numbers.
Taxpayers having their refunds deposited to two or three accounts must attach a Form 8888 to their returns indicating amount for each account and providing account information.
CAUTION - Special Rules for Refund Direct Deposits to IRA Accounts
Direct depositing a federal tax refund to an IRA requires a taxpayer to adhere to a special set of rules:
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Pre-established Account - A taxpayer must first establish an IRA account with a bank or other financial institution before a direct deposit can be directed to the account. Of course, the taxpayer must be qualified to make an IRA contribution for the particular year – for example, the taxpayer must have earned income.
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Trustee Notification – IRA contributions can be designated for (1) the prior year, (2) the current year, and (3) a combination of years. Thus, a taxpayer must notify the trustee in advance how to allocate the direct deposit funds., If not notified, the trustee can assume the deposit is for the year during which the deposit is made., For example, the 2021 refund credited during 2022 would be assumed to be for 2022. There is lots of room for error and taxpayers must be very careful to make the correct allocation before the deposit is received by the financial institution.
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Prior Year IRA Contributions – Contribution for the prior year can only be made up to the un-extended deadline for filing the return for that prior year. If the deposit isn't made by that date, the law precludes the trustee from allocating the deposit to the prior year. This creates a potential hazard for taxpayers filing late in the tax filing season and the direct deposit is not made before the due date. The law puts the responsibility for the timely deposit directly on the taxpayer.