How to Save Your Tax Refund for Retirement

If you're getting a tax refund this year, consider saving part of it for retirement. IRS form 8888 allows you to directly deposit your refund into several different accounts, perhaps including a savings account or individual retirement account. You can also use your tax refund to purchase savings bonds. Here are some of the ways your tax refund can help grow your nest egg.

Savings or investment account. A portion of your tax refund can be directly deposited into up to three different saving or investment accounts at a bank, brokerage firm or credit union. Putting at least a portion of your refund into a savings account instead of your checking account can help you to avoid spending it too quickly and begin to earn some interest on the money.

IRA. Part or all of your tax refund can be directly deposited into an IRA. This traditional IRA contribution will also reduce your tax bill, because income tax won't be due on that amount until you withdraw the money from the account. It's important to notify the trustee or custodian of the account about whether you want this contribution to be applied to tax-year 2014 or 2015. If you make no election the contribution will be applied to the calendar year in which it is received. Contributions for tax-year 2014 are due by April 15, 2015. You can defer paying income tax on up to $5,500, or $6,500 if you are age 50 or older, by contributing to a traditional IRA.

Roth IRA. The contribution limits for Roth IRAs are the same as those for traditional IRAs, but the tax treatment is different. Putting a portion of your tax refund in a Roth IRA won't get you a tax break on your current return, but withdrawals in retirement from accounts that are at least 5 years old will be tax free. Roth IRAs also give you more flexibility regarding the timing of withdrawals in retirement. If your income is low enough, both traditional and Roth IRA contributions can also qualify you for the saver's tax credit.

Savings bonds. You can use your tax refund to buy up to three different paper series I savings bonds worth up to a total of $5,000. I Bonds have an annual interest rate that is adjusted to keep up with inflation. The current rate is 1.48 percent. Interest is added to the bond monthly and is paid to you when you cash in the bond. The bond will continue to earn interest for up to 30 years, but you forfeit three months worth of interest if you don't hold the bond for at least five years. The bonds can be purchased in $50 increments in your name or given to someone else as a gift, such as a child or grandchild. Paper savings bonds are no longer sold at financial institutions, so if you want a paper bond to give as a gift you need to purchase it using your tax refund.

TreasuryDirect online account. You can request that your tax refund be deposited in your TreasuryDirect online account, where you can use it to buy additional types of savings bonds and Treasury inflation-protected securities. TIPS pay interest twice a year at a fixed rate and the principal increases to keep up with inflation, which can be useful for retirees who are worried about rising costs.

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google+ or email her at ebrandon@usnews.com.