If you feel like you haven’t saved enough for retirement, you aren’t alone. The Economic Policy Institute tracks how much Americans save for retirement, and their findings show that most people aren’t contributing enough to their nest egg to keep them from having to depend on Social Security for income after they stop working full time.
Fidelity recommends that to keep your standard of living in retirement, you should have one year of salary socked away by the time you turn 30. 40-year-olds should have three times their salary saved. By 50, you should have six times your salary saved.
If you aren’t quite there, dedicating your tax refund to beefing up your retirement account is a great move. The IRS lets tax filers deposit their refund directly into multiple accounts. This option is great for people who don’t feel like they are good at saving money. Since it never enters a savings or checking account, you can’t spend your refund.
Yearly contributions to an IRA could give your retirement income a healthy boost. You’ll get a tax deduction for contributions to an IRA. In fact, if your income puts you close to the next-lowest tax bracket, you could see a significant decrease in your taxes.
Contributions to a myRA or Roth IRA are post-tax, but that money will grow tax-free and when you retire withdrawals are tax-free. Your tax preparer or financial advisor can tell you what yearly contribution limits you face. They vary by your age and the type of account you’d like to fund.
Even if you dedicate your tax return to funding your retirement, it’s still important to maintain a budget that allows you to spend less than you earn and save some of each paycheck for your future.
How to direct your tax refund to your IRA
If you’d like to dedicate a portion of your tax return to your retirement savings and have the rest put into your bank account, use IRS Form 8888. You also have the option of directing your tax refund to a health savings account, which is another smart savings vehicle. If you don’t use the money for healthcare costs before you retire, you can access the funds without penalties or taxes.
To put all of your tax refund into a retirement account, you’ll need the routing and account numbers for your IRA. Use the direct deposit line on Form 1040EZ, Form 1040A, or Form 1040.
If the thought of socking away money you may need for emergencies makes you nervous, a Roth IRA is a great option. You can withdraw your original contribution amount without penalties or taxes if you need to.
Saving for retirement is important, and using your annual tax refund is a great way to start or increase retirement savings, and get some tax advantages when doing so.
Taxes can be overwhelming. That's why we've created the Sunset Finance Guide to Tax Returns to provide more information.