Does having the IRS deposit your tax refund directly into one or more individual retirement accounts (IRAs) sound like a good idea? The IRS does encourage this option as a way to speeed up retirement contributions.
It can make sense. For instance, if your tax refund goes directly to a retirement account, it’s not available to spend on that road bike or a Hawaiian vacation. Of course if you’re receiving a big tax refund you may be withholding too much from each paycheck and giving the government an interest-free loan (see March 3, 2013 post), but that’s another issue.
Still, direct deposits sometimes do go awry. Here are four potential obstacles that can derail your tax refund on its way to your account.
- Wrong account number. If you transpose a couple of digits on your tax return and those digits happen to indicate which financial institution or which account will receive your refund, your money could end up in someone else’s account. It could take weeks or months to straighten things out. Don’t expect the IRS to come to the rescue. They are very clear on the fact that accurate financial information is the responsibility of the taxpayer. Check and double-check those account numbers.
- Correction fluid and cross-outs. If the IRS gets your tax return and finds that the routing numbers have been manually revised, your direct deposit request will likely be rejected. You may receive an old-fashioned refund check in the snail-mail.
- Wrong type of account. It’s up to you to verify that your financial institution will accept direct deposits into an IRA. Some banks, for example, will reject direct deposits to anything other than a savings account. Do your homework up front.
- Refund adjustments. Sometimes the IRS corrects a taxpayer’s math or makes other adjustments that can affect the amount of the refund. In some cases, these adjustments may result in a direct deposit that exceeds the allowable IRA contribution amount. If so, you could be stuck with a penalty for excess contributions.
Direct deposit of your tax refund can be a hassle-free way to make an annual IRA contribution. But proceed with caution. Double check your return and verify that your bank or credit union accepts direct deposits to an IRA…. and don’t forget to double check your account numbers.