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It sounds like a great idea: Have the IRS directly deposit your tax refund into one or more individual retirement accounts (IRAs). In fact, the IRS touts this option as a way to speed up retirement contributions. The whole process is automated and simple.
It’s hard to argue with the theory. After all, if your tax refund goes directly to a retirement account, it’s not available to spend on that new leather sofa or Hawaiian vacation. (Of course, a big tax refund also may indicate that you’re withholding too much from each paycheck and giving the government an interest-free loan. But that’s another issue.)
Still, things sometimes go awry. Following are four potential obstacles that can derail your tax refund on its way through the direct deposit process:
* Wrong account number. Let’s say 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. If this wrong account number belongs to another customer, that mistake could take weeks or even months to correct. By the way, don’t expect the IRS to come to your rescue. They’ve made it abundantly clear that correct input of financial information on the tax return is the taxpayer’s responsibility — not the government’s.
* 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 get an old-fashioned refund check in the 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.
* Refund adjustments. Sometimes the IRS corrects a taxpayer’s math or makes other adjustments that can affect the refund amount. 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 will accept direct deposits to an IRA.
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