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Splitting Your Tax Refund

Three months ago I sent a tip about the Pension Protection Act of 2006; a bill passed late last summer that primarily included provisions geared toward helping consumers improve on long-term savings habits. Item #3 of those mentioned was an interesting change, one that you will likely have the opportunity to participate in shortly … splitting your tax refund.

Each year, more than 75% of U.S. taxpayers are entitled to a refund (of more than $2,000 on average). Studies have demonstrated that individuals are more likely to save if it is easy and automatic. The government is attempting to accommodate this tendency. In the past, the majority of refunds were provided via direct deposit to one’s checking account. With the new “split refund” option, individuals can opt to have their refund split into up to three different accounts. Account options include checking, savings, IRAs, and health savings accounts. Doing so appears very simple. Just include Form 8888 – Direct Deposit of Refund to More Than One Account – with your return. Indicate the account number and routing number for the financial account(s) where you want your refund deposited and instruct how you want the refund allocated among the accounts.

What you need to know

  • What is a split refund? A split refund allows you to divide your refund [in any proportions you want] among up to 3 accounts with U.S. financial institutions.
  • Does my refund have to exceed a certain amount to be eligible? The deposit into each account must be at least $1.
  • Can I split my refund among different financial institutions? Yes.
  • Must I split my refund equally? No. You have the flexibility to divide your refund however you choose.
  • What types of accounts are eligible? Checking and savings accounts, IRAs, Health Savings Accts, Archer MSAs, and Coverdell Education Savings Accts.

Things to do

  • Confirm that your financial institution will accept direct deposits.
  • Confirm your account numbers and routing numbers.

– YOU WILL NEED TO SET UP YOUR ACCOUNTS FIRST! If you want to have all or a portion of a refund put into [for example] a Roth IRA, you will need to have an account established in order to have money directed to the account.

More information about splitting your Federal Income Tax Refund can be found at the FAQ section of IRS.gov.