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A recent call with a financial advisor in New Mexico is representative of a common question on rolling over a federal income tax refund into an IRA.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“An investment client contacted their advisor and asked when the federal government would begin making contributions to their IRA. The advisor, unaware of such a feature, called the Retirement Learning Center for information.”
Quite possibly, the client’s question came about because of confusing two separate tax provisions. The first tax provision deals with tax refunds, and the second is a new provision where the Federal government will begin making matching contributions to certain eligible individuals. A review of each provision will help the answer emerge.
Tax filers can direct the federal government to electronically deposit tax refunds into designated accounts, including retirement accounts like IRAs. In addition to IRAs, the individual can direct the refund to be deposited into a Roth IRA, simplified employee pension (SEP) IRA (but not a SIMPLE IRA), a health savings account (HSA), an Archer MSA, or a Coverdell Education Savings Account (ESA).
If the tax filer directs the entire refund to one account, they will report this on their IRS Form 1040 (lines 35a-d). If the person is splitting the refund between multiple accounts, they would make that election by filing IRS Form 8888 Allocation of Refund along with their tax return.
The second provision, I suspect, is the Saver’s Match, effective next year. SECURE Act 2.0 changed the Saver’s Credit to the Saver’s Match, under which the federal government will make matching contributions of up to $1,000 to the retirement accounts of eligible individuals (based on contributions made and income level). Applicable plans include 401(k), 403(b), SIMPLE, SAR-SEP, and 457(b) plans, as well as IRAs and ABLE accounts. For example, a married couple with modified adjusted gross income under $41,000 would be eligible for a Saver’s Match based on their retirement contributions. The IRS provided some guidance in IRS Notice 2024-65, but more is needed.
A third proposal may also be part of answering the client’s question. In his State of the Union address, President Trump unveiled a proposal for a federal program to help workers without access to employer-sponsored retirement plans save for retirement through a 401(k)-like retirement plan modeled on the federal Thrift Savings Plan. The federal government would match up to $1,000 of participant contributions each year. This arrangement exists in theory only at this point. The administration has not yet released specifics on timing, eligibility, tax treatment, or plan administration.
Currently, tax filers may choose to have federal tax refunds electronically deposited into a variety of savings accounts. Additionally, starting next year, some individuals may be eligible to receive Saver’s Match contributions from the government, based on their retirement contributions and income. Plus, watch for more information on the president’s retirement plan proposal for those without access to retirement plans.