Rosanne Grande, CFP®, CSA, RFGSM Managing Director

A tax refund is usually the single biggest lump sum of money that most folks receive in the course of the year and, thanks to “split tax refund” provision written into the Pension Protection Act of 2006, taxpayers now have a new way of funding their checking, savings or retirement accounts. With this new split refund option, taxpayers can pay some bills, save for an emergency or save for retirement. [As financial planners…we opt for the IRA since it’s important to save money for retirement.].

The split tax refund permits individuals to directly deposit their refunds into the three different types of accounts mentioned above and with three different financial institutions. This split refund option is available whether a taxpayer files electronically or by mail. Taxpayers may continue to opt for a direct deposit into one account by filling in the appropriate line on Form 1040.

There are two requirements for these direct deposits:

• The financial institution(s) that you utilize must accept these direct deposits for your designated accounts.
  
  
• You must provide accurate account and routing numbers on the new, soon-to-be-released IRA Form 8888. A check will be mailed to the taxpayer if, in the event a direct deposit request is rejected, an IRA contribution is not made on time.

Important points if you are going to deposit your tax refund in an IRA account:

• You are responsible for informing the IRA custodian of the year for which the deposit is intended. The IRS will not indicate a contribution year for IRA accounts.
  
  
• If your financial institution denies a direct deposit, the IRS will issue that portion of the refund via a paper check.
  
  
• You should not exceed the annual contribution limitations for IRA accounts. For the tax year 2006, the Roth and traditional IRA contribution limit is $4,000. For those over age 50, the contribution limit is $5,000.
  
  
• It will be up to each taxpayer to keep track of their direct deposits, especially into an IRA, since contributions need to be made before the April 15 deadline.

Whether you opt for deposit into one account, split your refund or get a check in the mail, you can utilize the IRS' popular "Where's My Refund?" secure Web site service to track you refunds, or call 1-800-829-1954.