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Economic Stimulus payments in IRAs and other tax-advantaged accounts can be withdrawn without adverse tax consequences
Background:
Individuals are able to elect to have their federal income tax refund directly deposited into a tax-advantaged account like an IRA, health savings account (HSA), Archer MSA, Coverdell education savings account (ESA), or Section 529 plan.
Tax-advantaged accounts, like those described above, are subject to rules that restrict withdrawals.
An individual who elected to have a 2007 federal income tax refund deposited directly into a tax-advantaged account might not have been aware at the time that this election would result in his or her Economic Stimulus payment being deposited directly into the same account.
Stimulus payments deposited directly into a tax-advantaged account are subject to the general rules that apply to that account, which would normally limit an individual's ability to withdraw the stimulus funds without penalty.
Announcement 2008-44:
Announcement 2008-44 provides that individuals who have Economic Stimulus payments deposited directly into a tax-advantaged account can withdraw the funds without adverse tax consequences. Specifically:
An individual may withdraw an amount less than or equal to the amount of Economic Stimulus payment directly deposited into the tax-advantaged account.
Withdrawals may be made no later than the due date for filing a 2008 federal income tax return, plus extensions (in the case of a Coverdell ESA, even if an individual files a federal income tax return by the normal due date, without extension, he or she still has until May 31, 2009 to make a withdrawal).
Withdrawals that meet the above criteria will be treated as if they were never contributed to or distributed from the account; therefore, the amount withdrawn will not be subject to federal income tax or any additional tax or penalty.
According to our discussions with IRS employees, those who withdraw their stimulus payments from tax-advantaged accounts (which may be done without a penalty or tax consequences) will be required to fill out a supplementary section on their 2008 tax return. This section has yet to be drafted by the IRS, and any information they have provided to us thus far is subject to change.
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