WASHINGTON, D.C.—This week, U.S. Representative Rahm Emanuel (D-IL) introduced the Direct Deposit Savings Act of 2005, legislation that makes retirement savings easier by allowing taxpayers to deposit some or all of their Federal income tax refund directly into personal savings or Individual Retirement Accounts.      

            “I want to make it easy for Americans to invest in their futures,” said Emanuel. “This legislation will give all taxpayers a ‘one-click’ way to save. By simply checking a box, or clicking a mouse, taxpayers will be able to automatically direct some or all of their Federal tax return into an IRA where their hard earned money can grow, tax-deferred, until retirement.”

            Every year, approximately 100 million people receive a Federal income tax refund. And the average return is nearly $2,000 per person. The Direct Deposit Savings Act of 2005 will require the Internal Revenue Service to allow any taxpayer to check a box on their electronic or paper Federal income tax form and transfer their refund, in whole or in part into one or more savings accounts or IRAs. This bill will make it possible for Americans to save nearly $200 billion a year.

            “We need to start a Savings Revolution in this country,” said Emanuel. “With savings rates at historic lows and traditional pensions on the decline, it is more important than ever to give Americans new tools to save for retirement.”

            The Direct Deposit Savings Act will also allow for married taxpayers, filing jointly, to divide their refund into separate contributions to individual IRAs. And finally, any taxpayer who opts for the direct deposit into an IRA, and who files by April 15th would become immediately eligible for the standard tax deduction for the IRA contribution in that year.

            U.S. Representative Jim Cooper (D-TN), lead co-sponsor of the bill, said the change delivers great returns. “This is a simple change for the IRS to make, and it will provide a huge financial boost for many Americans,” Cooper said. “Our national savings rate is currently well below one percent and well-below that of most other developed countries. It is imperative that our government do everything possible to offer cost-effective means of boosting personal savings and that we do it quickly.” Cooper and Emanuel were leaders of a bi-partisan group of House members who sent a letter to IRS Commissioner Mark Everson in January urging the IRS to make the change as soon as possible.

            An example of the Direct Deposit Savings Act of 2005 at work in 2006: Jane and Joe are married and file a joint 2006 Federal income tax return on April 15, 2007. They are entitled to a refund of $2,500 for 2006. Under the new split refund legislation, they decide to check the appropriate boxes on their Form 1040 to direct that $1,000 of the refund be contributed to Jane's IRA, $800 to Joe's IRA, and the balance of $700 be refunded to them by direct deposit to their joint checking account. Jane's IRA is a deductible IRA and Joe's is a Roth IRA. The $1,200 contribution to Jane's IRA is deemed to have been made on April 15, 2007, in time to generate an IRA deduction for 2006 on the same return. This has the effect of increasing Jane and Joe's refund for 2006 from $2,500 to $2,780. They have the option of adding the additional $280 of refund either to the direct deposit to their checking account or to their IRA contribution, which in turn would generate an additional deduction and refund. Other provisions of Emanuel’s Savings Revolution Package include giving all Americans private 401(k)s on top of Social Security, using government funds to match contributions made by middle and lower income workers.

            “Congress must act to simplify and streamline the alphabet soup of sixteen different types retirement accounts,” said Emanuel. “We should reduce the paperwork and create tax incentives like this one that encourages middleclass to save.”