Using Refund Splitting to Fund IRAs


Individual taxpayers have the option to split direct deposit federal tax refunds among up to three (open) accounts with up to three U.S. financial institutions that accept direct deposits. Refunds can fund several kinds of accounts, including checking, savings, individual development accounts, IRAs (traditional, Roth and SEP), health savings accounts, Archer MSAs, and Coverdell education savings accounts.


Refund splitting is subject to both federal income tax rules and the policies of the financial institutions. For example, some financial institutions may not accept a joint refund into an individual account, and if the financial institution rejects the refund-splitting request, a paper refund check is sent. If allowed by the financial institution, a refund received by the April filing deadline for tax returns could be used to fund an IRA for the calendar year just ended. The advantages to funding an IRA with a tax refund are an increased IRA deduction and possibly a nonrefundable savers credit of up to 50% of $2,000 per individual (IRC § 25B). However, there are some intrinsic traps to funding IRAs in this way.


First, the year for which the contribution is meant to apply needs to be clearly specified; the financial institution’s default may be the year the IRA is funded rather than for the previous year. Second, taxpayers should verify the routing and account numbers, in part so they confirm they are funding their own account, not inadvertently contributing to someone else’s. Where the refund instructions have been obeyed but are inaccurate, taxpayers must work with the bank to recover the lost funds; the IRS assumes no responsibility for taxpayer error. (However, the IRS will correct its own errors.) Third, make sure the refund does in fact fund the account before the due date of the tax return; otherwise an amended return will need to be filed for the tax year just passed.


Another common error is to omit a digit from an account or routing number or to have deposit slip information that is different from what is on the check. If the bank rejects the routing and account information, the IRS will issue a paper check. This is in contrast to the ordering rules that normally apply to split refunds, where the last account listed is generally considered a “plug,” and any changes to the amount of refund for calculation errors are added or deducted from last accounts first (in reverse order) until exhausted. (Offsets for state income tax, child support, spousal support, student loans, or other programs administered by the Treasury Department’s Financial Management Service have still other ordering rules: They are deducted first from the deposit to the account with the lowest routing number, followed by second lowest routing number and then, if necessary, from the account with the highest routing number.)


Generally, taxpayers cannot split refunds on amended returns or where an injured spouse claim is made. Nor will forms with clearly changed (for example, erased or whited-out) information be accepted.


For a detailed discussion of the issues in this area, see “Refund Options for the 2011 Filing Season,” by Valrie Chambers, CPA, Ph.D., in the January 2011 issue of The Tax Adviser.


—Alistair M. Nevius, editor-in-chief

The Tax Adviser

Also look for articles on the following subjects in the January 2011 issue of The Tax Adviser:


  • An update on corporate tax developments.
  • A discussion of point-based employee reward programs.
  • A look at cost-sharing agreements and the arm’s-length standard.


The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail for a subscription to the magazine or to become a member of the Tax Section.


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