Expecting a refund during this tax season? There are several ways to actually collect that refund. Taxpayers may opt for a paper check, direct deposit or Refund Anticipation Loan (RAL). But, if you're looking for a quick and safe way to receive your tax refund, direct deposit is the preferred method -- and the most popular.
In 2012, more than 80 million of the 105 million total tax refunds were issued through direct deposit, according to the IRS. And it's no surprise why direct deposit is the way to go.
Direct deposits right into your bank accounts eliminates the worry of losing a paper check. You also will have access to your money faster than any other method. Typically, refunds via direct deposit are made within 10 days after filings have been processed. You won’t even have to deposit your money -- save you a trip to the bank.
Taxpayers can select the direct deposit option on their tax forms or through tax-preparation software.
Risks of other refund options
The other options you may be considering for your refund check may be the paper check, which may get lost or stolen through the mail. This can create a hassle if you check doesn’t reach its destination and you need a replacement. A paper check may also take longer to be processed by the IRS.
For those who are looking for super-fast money, there are RALs to consider. These loans are based on the estimated amount of money you are getting back from the government but can be completed in a matter of hours.
Refund anticipation loans may be worth considering if you are in a real financial bind but are not often recommended by personal finance experts. One reason is due to their actual cost. When calculating the interest on these types of loans, some companies may be considered predatory due to the steep interest charges and associated fees. Many consumers do not truly realize what they are giving up by applying for a RAL. When their refund comes in, they only end up with a small portion of it while the lender takes the rest.
Use the refund wisely
It can be sweet to dream about the awesome vacation you can take with your refund money but you need to put reality first. If there are bills to be paid, make those a priority. However, the IRS allows you to allocate cash through direct deposit into multiple bank accounts at one time. You can put a bulk of the cash into your checking account for immediate needs but also deposit another percentage into a savings account earmarked for the family vacation or other "want." It may not cover the entire cost but that deposit is at least a start towards your savings goal.
If you are completing your taxes on your own or through a tax professional, be sure to choose which option best suits your needs for accepting your tax refund. Fill out the appropriate information including the necessary details from your bank including routing and account number. If you are opting for deposits into multiple accounts, you will need to use IRS Form 8888 Allocation of Refund. This form allows you to divide up percentages of you refund into three bank accounts.
You should also check in with your bank about an IRS refund deposit to ensure there are no limitations. For instance, some banks may not allow the deposit of funds into an account that is not only yours. If you have a joint tax return with your spouse but not a joint bank account, you will need to discuss the potential problems with your bank first to prevent problems from occurring at the time of deposit.