Tips for Using Your Income Tax Refund to Save

posted 3/2/2017 in Banking

Tips for saving at tax time!

You work hard for your money, oh so hard for your money. You know what you make, but do you know how much you keep or have a plan to save?  For some, it may feel like it’s impossible to save because so much of what we make goes toward taxes.

Luckily, the IRS recognizes that it’s easier to save if there are opportunities that make it easy to save.  Here, we tell you about the different options available to you for using your tax refund to save.

Direct Deposit for the Save!

If you will be getting a refund on your federal income tax refund, the IRS has made it easy to save by using direct deposit. Direct deposit is also the safest and easiest way to get your refund. If you want to have your refund direct deposited into more than one account, all you have to do is submit a special form (Form 8888) when you file your tax return. This form allows you to tell the IRS how you want to save your refund among the following options:

  • Contribute to an IRA
  • Buy U.S. savings bonds
  • Deposit to a savings or checking account, Health Savings Account (HSA), Coverdell Education Savings Account (ESA) or other savings vehicle

Using direct deposit for your income tax refund allows you to save all or part of your refund.  So, you could direct deposit some of your refund to IRA savings or use it to purchase U.S. savings bonds, then have the rest put in your checking account or HSA. 

Contribute to an IRA

You can direct all or part of your income tax refund to an individual retirement account (IRA): either a traditional IRA, a Roth IRA or, if you're self-employed, a SEP IRA. Here are a few guidelines:

  • Set up your IRA Account.  If you don’t already have an IRA account, set up your retirement account before you request the direct deposit. It’s also a good idea to check with your financial institution to be sure they allow direct deposits to IRA accounts.  At Lincoln Savings Bank, we will work with you individually to determine if we are able to allow a direct deposit of your income tax refund into your IRA account with us.
  • Notify your IRA Trustee. Be sure to let your IRA trustee know the IRS will be transferring money into that account. Also, be sure to tell your IRA trustee what tax year you want the refund deposit applied toward.  According to the IRS, the direct deposit from the IRS won't indicate whether the refund is for a 2016 or 2017 contribution.  The trustee may assume the deposit is intended to be applied toward this year, so that could be a problem if you wanted it to be a previous year contribution and claimed a deduction for it.
  • Watch the Deadlines.  If you are using the refund as a prior year contribution, be sure you file early enough so your refund is directly deposited into your IRA account. All deposits need to be filed by the April 18, 2017 tax filing deadline.  It usually takes around 2 weeks for an e-filed direct deposit to be completed, so plan ahead to be sure the money is in your account before the deadline.  Even one day after the deadline will mean it’s counted as a 2017 contribution even if you wanted it to be applied to 2016.
  • Follow IRA Contribution Limits.  You must meet all the IRA rules for making a contribution?. A few of these limits include:
    • For 2016 and 2017, your total contributions to all your traditional and Roth IRAs can’t be more than $5,500 ($6,500 if you’re age 50 or older). 
    • Your contribution also can’t exceed your taxable compensation for the year. 
    • You must be under the age of 70 ½ for all of 2016 to make a traditional IRA contribution, and Roth IRA contributions might be limited based on your filing status and income  (e.g. under $184,000 if you are married and filing jointly for 2016).

Buy U.S. Savings Bonds

According to the IRS, the option to use your income tax refund to buy U.S. savings bonds first became available in 2010. For the 2016 tax year, you can buy up to $5,000 of Series I U.S. savings bonds in increments of $50 using all or part of your income tax refund.  Series I U.S. Savings Bonds are a liquid savings product that earn interest and are low-risk.

Savings bonds can’t be bought or sold on secondary security markets but they typically can be redeemed at any time after 12 months for the principal amount plus accrued interest. Some penalties may apply if they are redeemed in the first 5 years. The savings bond accrues interest until it reaches maturity in 30 years or until it’s redeemed if reached in less than 30 years.

To purchase savings bonds using your income tax refund, you will submit Form 8888 when you file your tax return. You buy savings bonds at face value, which means you get a $50 savings bond for every $50 you pay using your refund.  They will be issued as paper bond certificates in your name.  If you are married and filed jointly, the bonds will be issued in your name and your spouse’s name.  If you purchase savings bonds for someone else, the bonds will be issued in the name listed on Form 8888.

No Excuses!

With all these options available to you for saving your income tax refund, there are no excuses not to save!  Consult your tax preparer if you have questions about how to complete the appropriate form when you file your income taxes.  Give us a call if you need help getting an IRA account set up.

Lincoln Savings Bank, Member FDIC

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