The average tax refund totaled $3,120 for the 2015 tax filing season, according to data from the Internal Revenue Service (IRS). If you’re one of the 40 million or so Americans poised to get a refund this year, the most important question to ask yourself is what you’re going to do with the money.
You could use it to pay down credit card debt or cover your dream vacation but there’s a better way to put the money to work: funding your retirement. This year, the U.S. Treasury Department is coordinating with three of the nation’s largest tax software providers – TaxAct, TaxSlayer and TurboTax – to offer taxpayers a relatively simple way to kick start their retirement savings via a myRA.
The myRA program, short for "my Retirement Account" is a U.S. Treasury Department-run retirement savings alternative to traditional and Roth IRAs. The money you save in a myRA is invested in U.S. Treasury savings bonds, which are a much safer investment alternative to stocks. The myRA program was developed for people who don’t have access to an employer’s retirement plan, such as a 401(k), and prefer a safe and affordable way to save for retirement.
There are no fees or account minimums to open a myRA, but there is a limit on what you can contribute. Because you’re investing in a single retirement savings bond, the most you can save in a myRA is $15,000. Once you hit that limit or reach the bond’s 30-year maturity date, the money in your myRA will have to be rolled over to a Roth individual retirement account.
By comparison, you can contribute up to $5,500 per year to a traditional or Roth IRA in 2017, along with an additional $1,000 in catch-up contributions if you’re 50 or older, with no account-size limits. Once you turn 70½, you’re required to begin taking minimum distributions from a traditional IRA (see 6 Important Retirement Plan RMD Rules).
If you’re anticipating getting a few hundred or a few thousand dollars back in your tax refund this year, depositing that money into a myRA account is simple. When you prepare your tax return with TaxAct, Tax Slayer or Turbo Tax, you’ll be linked directly to the myRA website, where you can open your account. You can then opt to fund your new retirement account with some or all of the money from your tax refund. It’s a virtually hassle-free way to begin building your nest egg. (Other options include transferring funds to your myRA from your bank account or paycheck.)
As another incentive to jump on the myRA bandwagon, certain taxpayers may be eligible for the Retirement Saver’s Credit. This credit is worth up to $2,000 for single filers and up to $4,000 for married couples filing jointly. Credits reduce your taxable income on a dollar-for-dollar basis so claiming every available credit is a wise move if you want to minimize your tax bill. This credit is also available to eligible savers who contribute to a traditional or Roth IRA or an employer’s plan. Just remember that eligibility is based on your filing status and adjusted gross income. Click here for details.