Tax refunds on prepaid cards coming

NEW YORK (CNNMoney) -- Thousands of Americans will get tax refunds on a prepaid card instead of a paper check as the government looks to cut costs and give people without bank accounts an easier way to get their money.

The Treasury Department launched the pilot program Thursday, saying it will mail letters next week to 600,000 taxpayers with annual income under $35,000.

The letters will give taxpayers the option of activating a MyAccountCard Visa Prepaid Debit Card, on which their 2010 federal tax refund would be direct deposited.

"This pilot program will provide low- and moderate-income Americans with a low-cost option for faster delivery of their federal tax refund," said Deputy Secretary of the Treasury Neal Wolin.

Once taxpayers open a prepaid debit card, they can reload it with their own money and use it just as they would a regular debit card, but without opening a traditional bank account.

"This innovative card can be used for everyday financial transactions, such as receiving wages by direct deposit, withdrawing cash, making purchases, paying bills, and building savings safely and conveniently, giving users more control over their financial futures," said Wolin.

Not only would it provide a "low-cost option" for Americans -- it could save the government millions of dollars per year, a Treasury spokeswoman said.

While it only costs the government 10 cents to direct deposit money onto a card, it costs a dollar each time it mails a paper check -- adding up to $40 million per year.

In contrast, the government expects to spend $1.5 million on the prepaid card test. The pilot ends in April, but customers will have access to their account under the same terms and conditions for at least one year.

Treasury said it will issue several versions of the prepaid card -- each with different features, fee structures and marketing messages -- during the pilot to monitor their effectiveness before the cards are rolled out as a permanent part of the tax filing process.

The prepaid card is free for all customers, and the monthly service fee will range from being free to $4.95. All cards will offer unlimited free ATM withdrawals at 15,000 in-network ATMs, while a $2.50 service fee and a 50-cent balance inquiry charge will be incurred for using out-of-network ATMs.

Online bill pay, balance inquiries and direct deposit are all free. But holders pay $4.95 to replace a lost or stolen card, $2.50 to withdraw cash from a teller, $4.95 to get a second card and as much as $4.95 to add money in-person at a retail location.

The Visa card will be issued by Utah-based Bonneville Bank, and the Treasury will work with prepaid card provider Green Dot Corp. during the pilot.

In a separate pilot launched this week, Treasury will also offer tens of thousands of payroll-card users -- or potential users -- the opportunity to direct deposit their 2010 refund onto existing payroll cards. Treasury said more than 1.7 million U.S. workers use payroll cards to receive wages.