If there were only one truth about retirement planning, it would this: Nothing is ever as easy as it appears.

Take, for example, a new law that lets taxpayers directly deposit their 2006 tax refund into an individual retirement account, a Roth IRA, a SEP-IRA, a health savings account (HSA), an Archer medical savings account (MSA) or a Coverdell education savings account (ESA), among other types of accounts.

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On the surface, this new "split refund" law seems fairly straightforward and the IRS and tax preparers are touting its benefits. Consider, for instance, what could have happened to retirement security in America if the 57 million taxpayers who used direct deposit in 2006 put their average $2,619 refund into an IRA instead of a checking account.

"It's a good idea in theory," Ed Slott wrote in the current issue of Steve Leimberg's Employee Benefits and Retirement Planning e-mail newsletter. But theory and reality are not always the same. "The idea was a good one and still might prove to be, but as with anything new there is a learning curve and there are many challenges here for advisers (and taxpayers)."

Taxpayers who want to split their direct-deposit refunds among two or three different accounts or financial institutions, including an IRA, must complete the new IRS Form 8888. It's only two pages, but contains six "caution" icons.

"If IRS thinks it is important enough to warn you, you had better pay attention," said Slott. Here is Slott's list of 12 potential problems with a split-refund-to-IRA direct deposit.

1. Held up in the mail. If the tax return gets held up in the mail and arrives too late, after April 17, Slott said the direct deposit will still work, assuming no other problems, but the IRA contribution will be made for the current year, 2007, even if the taxpayer intended it to be made for the prior year, 2006.

2. Too close for comfort. Taxpayers who want to make sure their refund gets credited as a 2006 IRA contribution should file as early as possible, If the return is filed electronically, taxpayers need to leave themselves plenty of time — at least three weeks and perhaps more. If the return is filed on paper and mailed in, taxpayers should file at least six weeks before the due date, no later than March 1.

3. The wrong year. An IRA contribution can be made up to April 15 for the prior year (April 17 for 2006 contributions), but if the IRA contribution is made by directing a tax refund to the IRA, the taxpayer must contact the IRA custodian and tell them which year the contribution should be applied to. "It will be up to the taxpayer to ensure that the contribution is credited to the correct year," said Slott. Taxpayers who mess this up may have to file an amended return plus pay interest on additional tax owed.

4. Joint tax refunds going into one IRA. The IRS notes that "in the case of a joint refund, taxpayers can designate deposits to a joint account or to an account controlled by a spouse." The tax agency will allow a deposit of a joint refund to an IRA "owned by one spouse, if the financial institution accepts direct deposits for IRAs and will accept a joint refund to an account of only one spouse." Taxpayers need to check their banks' policies before taking this option.

5. Wrong type of account. IRS warns taxpayers to verify accounts, but Slott questions how the taxpayer can guarantee the transfer. "Even if you have the right type of account, you must know to check the right box on Form 8888. You have to check either 'Checking' or 'Savings,'" he said. An IRA would usually be a "Savings" account, but check anyway just to make sure so that your deposit will be accepted. Also, do not check both boxes, said Slott.

6. Cross-outs, correction fluid and other dumb stuff. The IRS has warned taxpayers that they cannot cross out or use correction fluid on any account or routing numbers entered on the tax form; otherwise the agency will reject the direct deposit and send a refund check, which might not be received until after April 17. In addition, IRS said refund amounts designated to go into each of several accounts must add up to the total amount of the income tax refund as shown on the tax return. If they are not the same amount, IRS will send a refund check to the taxpayer.

7. The account must be open. You'd think this wouldn't be a problem but it can be, Slott said. The IRA must be established before the direct deposit is requested.

8. Wrong account number. IRS reminds taxpayers that they must make sure to provide the right routing number and account number. Form 8888 even shows a copy of a check and has big circles identifying the routing number and account number so people will know how to recognize them. If the number entered on the tax form is even one digit off and does not pass IRS' validation check, IRS will mail a check for the entire refund.

9. Wrong account number — but right for someone else. If the account number is wrong, but it turns out to be an account number of another customer of the financial institution and the direct deposit is accepted in their account, IRS basically says, you're on your own there. "They say that you will have to take this up directly with your financial institution to 'recover your funds,'" he said. "The words 'recover your funds' can never be a good thing."

10. Wrong routing number (even if you think it's the right number). Believe it or not, the routing number on the check may not be the number the financial institution wants you to use. Another "caution" icon on Form 8888 warns that the actual check "may state that it is payable through a financial institution different from the one at which you have your account. If so, do not use the routing number on that check. Instead, contact your financial institution for the correct routing number to enter." "Who would have even thought of this?" Slott asked.

11. Don't exceed the IRA contribution limit. Some taxpayers may not know that there are limits for IRA contributions and may direct a refund of, say, $18,000 to their IRA when the annual limit is $4,000. IRS does not say that the direct deposit would be rejected but does say that if it exceeds the limit, there could be a penalty.

12. Refund adjustments — math errors or IRS adjustments. If the IRS adjusts — either for math errors or refund offsets — a taxpayer's refund that was to be directly deposited to an IRA, even more problems arise. For instance, if the refund is increased, then the extra amount of the refund will be applied to the last account designated. If that account is an IRA, it could cause more funds to be contributed to the IRA than originally reported on the tax return and possibly create an excess IRA contribution. If the refund is decreased, it creates another set of problems.

So what's a taxpayer to do given those landmines?

"The best thing (a taxpayer) can do to eliminate as many of these potential problems as possible is to either not use the direct deposit or use it only prospectively for making current-year IRA contributions," said Slott.

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