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TAX TIP: YOU CAN FUND AN IRA WITH YOUR REFUND

April 06, 2008

We will discuss the different flavors of individual retirement arrangements, or IRAs, this week. Some IRAs are better than others, but they are all good. Even the least of them enable you to earn the higher interest rates of fully-taxable investments in a tax-deferred vehicle.

Yet many people don't bother with IRAs -- often because they never set aside any cash to save.

For many folks, their tax refund is their biggest source of free cash available all year. This is a great opportunity to fund an IRA by having your refund deposited directly into one. Based on the IRS refund-cycle chart, it's too late to fund a 2007 IRA with your 2007 tax refund, as the IRA has to be funded no later than April 15. But if you haven't filed yet, you can use your 2007 federal refund to get started on your 2008 IRA. And if you have a SEP (simplified employee pension) and you extend your return, you still can use your 2007 refund to help fund your 2007 SEP.

You can use Form 8888 to have your refund deposited in your IRA. You have to make sure:

- The IRA is with an institution that can accept a direct deposit. A bank IRA can do so.
- You have to be sure they will accept it.
- You should tell the institution what year the IRA is for (but unless it's a SEP, at this point it has to be for 2008).

The maximum contribution for non-SEP IRAs is $5,000 for 2008, or $6,000 for taxpayers who will be age 50 or older by the end of 2008. If your refund is larger than than that, you can use Form 8888 to split the refund between your IRA and your other bank accounts.

This is part of a series of 2008 filing season tips the Tax Update is running through April 15. Stop back for a new one daily!

Tags: IRA.SEP.

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