by Denise Appleby CISP, CRC, CRPS, CRSP, APA
Individuals who elected to have their federal tax refunds credited to their individual retirement arrangement (IRA), health savings account (HSA), Archer MSA, Coverdell education savings account (ESA) ,or qualified tuition program account (QTP or section 529 program) via direct deposit are eligible to withdraw those amounts on a tax and penalty-free basis.
Background
Economic Stimulus Payment:
Eligible individuals, who file a 2007 federal tax return, will receive an economic stimulus payment. In order to be eligible to receive a payment, taxpayers must have a valid social security number, and receive at least $3,000 of income for the 2007 tax year. Eligible individuals will receive up to $600 ($1,200 for married couples), and parents will receive an additional $300 for each eligible child younger than 17. For more information, visit the IRS’ Economic Stimulus Payments Information Center.
Taxpayers, who indicated on their 2007 federal income tax return that refund amounts should be directly deposited into one account, will have their economic stimulus payments directly deposited to that account.
Taxpayers who indicated on their 2007 federal income tax return that refund amounts should be directly deposited into more than one account will receive their economic stimulus payment as checks; the amounts will not be directly deposited into any of their accounts. Therefore, these individuals will not benefit from the tax relief provided for the economic stimulus payments that are credited to IRAs, HSAs, Archer MSAs, , ESAsand QTPs via direct deposit.
Direct Deposit of Tax Refund
Effective January 2007, taxpayers are allowed to split their tax refunds for direct deposit to two or three accounts. Prior to January 2007, tax refunds could be credited to only one account via direct deposit. Accounts eligible to receive these direct deposits are checking, savings, or other accounts such as IRA, HSAs, Archer MSAs, and ESAs. This split-refund program allows taxpayers to deposit their refunds via direct deposit with any U.S. financial institution as long as they provide valid routing numbers and account numbers. Those who elect to have their refunds deposited into more than one account are required to file IRS Form 8888 along with their tax return.
Income Tax and Early Distribution Penalty
Withdrawals from IRAs are subject to income tax, unless the amount is attributed to nondeductible contributions or rollover of after-tax amounts. Taxable amounts withdrawn from the IRA before the IRA owner reaches age 59 ½ are subject to a 10 % early distribution penalty unless an exception applies. For HSAs, ESAs, and QTPs, certain distribution amounts that are not used for eligible expenses are subject to income taxes and the early distribution penalty unless an exception applies.
Waiver of Income Tax and Penalty
Any income tax and/or early distribution penalty is waived for amounts attributed to the economic stimulus payment, providing the withdrawal is made no later than the individual’s 2008 tax filing deadline- including extensions, or in the case of an ESA, the later of May 31, 2009, or the deadline for filing the individual’s income tax return for 2008, including extensions.
Tax Reporting Requirements
Financial Institutions
Given that financial institutions will likely be unable to distinguish amounts attributed to economic stimulus payments, they should report the deposits and withdrawals of these amounts as they would any regular contributions and distributions from the accounts.
Account Owners
Information on how to exclude these amounts from income will be provided to taxpayers in the instructions for filing tax returns for 2008.
Additional details are available in IRS Announcement 2008-44
