Removing Economic Stimulus Deposits from Tax-deferred Accounts

The Economic Stimulus Act provides a tax rebate to eligible individuals based on their filing status and income. Taxpayers who indicated on their 2007 federal tax return that refund amounts should be direct deposited into a specific account will have their economic stimulus payment direct deposited to that same account. That account could be a checking or saving account or a tax-favored account such as an IRA. However, taxpayers who elected to direct deposit their 2007 refund into more than one account, will be mailed an economic stimulus check

The objective of the economic stimulus checks was to put money in the hands of consumers to be spent and, therefore, "stimulate" the economy. Funds sitting in an IRA or other tax-deferred account are being saved, not spent, and will not directly stimulate the economy.

To alleviate this situation, the IRS recently announced that economic stimulus payments direct deposited into IRAs and other tax deferred accounts may be withdrawn tax-free and penalty-free. This relief is designed to help taxpayers who may have been unaware that by choosing direct deposit for their entire regular tax refund, they were also choosing to have their stimulus payment direct deposited as well. Withdrawals may be made from these tax-favored accounts in amounts that are less than or equal to the direct deposited stimulus payment. Thus, for example, a taxpayer whose $1,200 stimulus payment was direct deposited into his or her IRA can take out up to $1,200 from the IRA, tax-free and penalty-free.

To qualify for the recently announced relief, funds must be taken out of the tax-deferred account by April 15, 2009, for most taxpayers or by October 15, 2009, for those who obtain tax filing extensions. Without this relief, taxes, penalties, and other special rules would apply to amounts removed from these accounts. Regular tax refunds are not eligible for this relief.

Please call us if you have questions about removing economic stimulus payments from an IRA or other tax-deferred account, or any other questions about tax return preparation or planning.