About that direct deposit of refund to an IRA

[Black Bart]

Can it be used to fund a 2006 IRA (the one you took to get the refund) or does it have to apply to 2007 only?

[Larmil]

Direct deposit to IRA

It can be used for either 2006 or 2007.

[dsi]

However, THE CLIENT is fully responsible for telling their financial institution which year it applies. If they get it wrong...that would be very unfortunate.

[Koss]

IRA Funding: CAUTION

I agree that in theory the direct deposit of a tax refund can be used to fund an IRA for a 2006 or 2007 contribution.

However, many financial institutions will automatically treat any direct deposit as a current-year contribution. Here's why:

When you make an IRA contribution by mailing them a check, or by authorizing the IRA trustee to initiate an electronic funds transfer from your checking or savings account, you submit some type of form with your payment. Either there is an old-fashioned coupon or deposit slip to accompany the check you are mailing, or there is a web-based form you complete to authorize the electronic funds transfer. This form has a place for you to indicate whether the contribution is for 2006 or 2007.

When the IRA trustee receives a direct deposit--whether it is from the IRS, the state treasurer, or your employer, there is no way to specify which year the contribution is for.

So most institutions will default the contribution to the current year.

You may be able to get them to re-categorize it, if you notify them very soon after the deposit hits. But you better get some kind of written confirmation.

Read the terms and conditions of any IRA account that allows contributions by direct deposit. Most of them will tell you that it defaults to the current year.

Also: one of the professional organizations raised a question about returns that are electronically filed near the end of March and the beginning of April. You need to be very careful about trying to use the refund for a prior year contribution at this point, because if anything goes wrong, the direct deposit won't hit the account until after April 16, and then it's too late for a prior year contribution.

Even if you and the client do everything right, the electronically filed return could be rejected. And by the time you and the client figure out why it was rejected and fix it (say, for example, it was just a bad birthdate, or a married last name issue), it will be too late. And the client will either have to make the prior year contribution with other funds, or, worse yet, if they don't have other funds, you may have to change the return to remove the IRA deduction.

Or send them down the street to get a RAL, so they can fund the IRA by the deadline...

(Just kidding.)

Burton M. Koss

[Black Bart]

Thanx folks!

Larmil and David -- I appreciate it.

Burton -- all good points and certainly food for thought -- thanks again.

P.S. to Larmil -- if you need some "heavy-duty" tax/accounting advice, there's a fellow Missourian on this board posting as "OldJack," whom you may wish to consult. Please however, keep any requests "low-key" as, being quite modest, he is very reluctant to admit that he's committed the entire IRS code book and all regulations therein to memory.