Withdrawing Direct Deposits of Stimulus Payments

Taxpayers who used direct deposit for their 2007 refunds automatically received their stimulus checks in the same way. Direct deposits of 2007 tax refunds could have been directed not only to checking or savings accounts, but also to IRAs, health savings accounts (HSAs), Archer medical savings accounts (MSAs), Coverdell education savings accounts (CESAs), or a qualified tuition program account (QTP or Section 529 program). Thus, if you directed the IRS to deposit your 2007 tax refund into your IRA, then your economic stimulus payment is automatically send to that same account.

Ordinarily, contributions to and distributions from any accounts other than your personal savings or checking accounts are subject to tax rules and restrictions. The IRS now provides relief if you want to remove some or all of your stimulus check from these accounts.

What to do

You can opt to withdraw some or all of your stimulus payment from your IRA, HSA, MSA, QTP, or Section 529 program. You can do this, for example, if you want to use the money for another purpose, such as paying down your credit card debt or simply filling up your gas tank. You should do this to avoid penalties for excess contributions in some cases, as explained below.

Time limit: The IRS says that no unfavorable tax results will apply for withdrawals made no later than the time for filing your 2008 income tax return, plus extensions, for all accounts other than CESAs. For CESAs, the deadline is the later of May 31, 2009, or the time for filing the 2008 return (plus extensions), whichever is later.

If you fail to take withdrawals by these deadlines, then applicable restrictions will apply. For instance, if you had the IRS directly directed your 2007 refund into a Roth IRA, then having your stimulus check deposited into the same account could result in an excess contribution.

For example, if you are 45 years old and the 2007 refund amount applied to your 2008 Roth IRA contribution was $5,000 (the contribution limit for 2008), then any stimulus payment added to the Roth IRA would put you over the limit; you must withdraw the full stimulus payment to avoid excess contribution penalties.

If the financial institution reports contributions and withdrawals to the IRS because it can't distinguish where the deposit came from (e.g., reports an IRA withdrawal on Form 1099-R), you'll have to explain this on your 2008 return. The IRS promises to provide instructions for this.

Caution: Before withdrawing any automatic deposit to an account, check with the financial institution about any fees or financial penalties you might incur.

Source: Announcement 2008-44; IR-2008-68