Why You Should Deposit Your Tax Refund Into A Retirement Account

Most Americans will be getting a tax refund in the near future and will use the extra funds to pay off debt or purchase discretionary goods. But, is paying off debt or spending money on discretionary goods the best choice? Why not directly deposit your refund into your retirement savings account? It could be a wiser choice that may come back to benefit you more. The answer to this question really depends on the individual, but if you were considering putting your refund money into a retirement savings account, this article will help you do it.

Why Deposit?

Current tax laws strongly favor depositing money into retirement accounts. The money can go into a Roth IRA, a SEP-IRA, or a traditional IRA. The details vary, but all of them allow you to invest money without exposing it to the usual taxes, and to access that money once you are retired.

Taxes will normally take a large portion of the money that you make from investments, so using a retirement account will make you have a larger nest egg in the future. This is a particularly good option for people who were planning on using their tax refund for investments, since it will make those investments more effective. Most other people can benefit from either a full or a partial deposit into a retirement account, but you should compare your expected gains to the expected results of other uses just to be sure. You may be surprised to find out how big a difference an IRA can make, so it always pays to double check!

How To Do It

Arranging a direct deposit into a retirement account for your tax refund is as easy as filling out the right line on the form. Most people will want to use either form 1040, 1040A, or 1040EZ, which are the most common forms used for tax returns. All three of those forms will have a line for direct deposit into a retirement account. Simply fill out that line with your account and routing numbers, then submit it as normal. This will deposit the entire refund into the account.

Partial refunds are a little bit more complicated, so you may want to use a tax software or consult a tax professional. Partial refund require IRS form 8888, which will allow you to split your refund between a retirement account, a checking account, or even several different retirement accounts. This form also gives you the option to buy a limited number of savings bonds at the same time. If you’re unsure about how you to split the deposits or if the bonds are a good idea, you may want to consult with a tax advisor to figure out the most optimal solution.