We are in the midst of Fall, and pumpkins abound. They are in stores, pumpkin patches, and the season's favorite flavor. Whether it is a spiced pumpkin latte, pumpkin donuts, pumpkin bread, or pie, we love pumpkin. Fall is literally a season that has its own flavor. Something we wait months for, then we enjoy the fruits of the pumpkin harvest. YUM!!!
Do you feel the same way about Tax season? After you gather your tax documents and have taken stock of your financials, do you long for the day you meet with your tax professional? After all, you worked hard to grow & gather, and now you are ready to reap the fruits of your labor - a REFUND! You can almost taste it, like a spiced pumpkin latte or pie. It's Tax season, and you hope for a good harvest. Once you have that refund in the barn, what will you do with it? Here is an idea, fund an IRA.
You may ask, "Will the IRS allow me to fund an IRA with my tax refund?". The answer is YES; they will. Learn how to do this while avoiding some of the traps that could be lurking. Read the article below, "Using a Tax Refund to Fund an IRA in 5 Easy Steps."
Using a Tax Refund to Fund an IRA in 5 Easy Steps…
What does the basic process entail? An income tax refund can be directly deposited to an IRA up to the annual contribution limit. The contribution limit is $6,000 ($7,000 for individuals aged 50 or older) for 2021 and 2022. It can also be split among multiple accounts.
- It is tax time! Prepare your tax return for the year.
- Determine the refund amount. Once you know how big your refund will be, decide how much, if any, you would like to contribute to your IRA or Roth IRA up to the maximum annual contribution allowed.
- One, two, three. A refund going to only one account can be done directly on IRS Form 1040. Prepare IRS Form 8888 to direct the refund to up to three accounts.
- Watch out! If you use Form 8888, pay attention to the five cautions provided by the IRS in the instructions to ensure that you do not fall into any of those traps. The form can be found on the IRS website (www.irs.gov).
- Follow-up, follow-up, follow-up. If the IRA deposit is meant to be for the prior year, make sure the institution will code it that way, and that it is received in time. If the refund amount is adjusted for math errors or tax adjustments, and check which accounts on the form are affected. You may need to do an amended return if the IRA deposit is adjusted. If your refund is offset (e.g., because you owe past-due taxes), also check which accounts are affected. Again, you may need to do an amended return. If the funds go into the wrong account, deal with the institution to get the funds credited to the correct account.
Copyright © 2022, Ed Slott and Company, LLC- Reprinted with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
If this article has left you with questions, don't hesitate to contact us. We are here to help and want you to reap the benefits of our knowledge.
David S Dixon, CFP®
Preparing For Year-End & The 2022/2023 Tax Season --- Click on this link to read more.