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Don't Blow Your Refund! Why You Should Consider Using an IRA

Tax Planning Retirement

In 2017, the average refund received was just under $3,000.  Receiving a refund is exciting and many tax payers utilize the funds to pay down debt, add to a rainy day account, make a large purchase, or apply it to next year's taxes (which is still a good idea if you pay quarterly).  Did you know there's something else you can do with that money?  Consider using the direct deposit option and sending all or part of your refund directly to an individual retirement account (IRA) - helping your retirement savings grow!

You are able to direct all or part of your refund into a traditional IRA, a Roth IRA, or a SEP-IRA.  You cannot use a SIMPLE IRA.  For both tax year 2017 and 2018 you are able to contribute up to $5,500 for a Roth or Traditional IRA.  If you are 50 or older you may contribute an additional $1,000 (known as a catch-up contribution) for a total of $6,500 annually.  Income limitations exist so check with your CPA about your eligibility.

You also have the option of directing your refund into a health savings account (HSA).  This is a great option for anyone, but especially those nearing retirement who haven't built up savings in a HSA.  Why?  Many retirees take money from their 401k to pay medical expenses, but then have to pay taxes on the money they withdrew.  HSA dollars used for qualified medical expenses are not taxed.  For 2018, HSA limits for self-only coverage increased from $3,400 (2017) to $3,450.  For families, the limit is up to $6,900 ($6,750 in 2017).  There is also a catch-up contribution limited to $1,000 for those who are 55 or older (the same for 2017 and 2018).

Worried you may need the refund for an emergency?  Then consider using a Roth IRA.  This type of account will allow you to take back your original contribution without paying taxes or penalties.  If you don't end up needing the money, it will continue to grow in the account.

You can still designate the deposit for the 2017 tax year as long as the deposit is made by April 17, but you'll need to call the company to request the deposit count towards 2017 - otherwise it will automatically be designated for 2018.  If you plan to apply it to tax year 2017, be sure to file early!  The deadline is for the deposit, not the day of filing.

Will you owe taxes this year?  Talk to your CPA about funding a traditional IRA.  He or she can tell you how much money you need to put into an IRA to reduce your income tax liability.