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CCH® PENSION AND BENEFITS — 5/13/08

IRS allows tax-free withdrawal of “Economic Stimulus Payments” from IRAs

Individuals whose Economic Stimulus Payments are made by direct deposit to their IRAs or other accounts afforded special tax benefits may withdraw these payments without incurring any adverse tax consequences, according to an IRS announcement.

The Economic Stimulus Act of 2008 provides for payments to be made to eligible individuals in an amount determined under the rules of Code Sec. 6428. These payments are referred to as “Economic Stimulus Payments.” Taxpayers who indicated on their 2007 federal income tax return that refund amounts should be directly deposited into an account specified on the return will have their Economic Stimulus Payment directly deposited to that same account. Where that account is an IRA, a health savings account (HSA), an Archer MSA, a Cover-dell education savings account (CESA), or a qualified tuition program account (QTP or section 529 program), distributions from the account could be subject to federal income taxation, including possible penalty taxes. To the extent that the withdrawal is made no later than the time for filing the taxpayer’s income tax return for 2008, plus extensions, the amount withdrawn will be treated as neither contributed to nor distributed from the account. Thus, the amount withdrawn will not be subject to regular federal income tax nor to any additional tax or penalty under the Code.

Financial institutions receiving the direct deposit of the Economic Stimulus Payment and making the distribution should report the deposit and distribution in the usual manner. Taxpayers will receive instructions in the Form 1040 package that will allow them to report the distribution on their individual income tax return in a manner that shows that the amount withdrawn is not subject to taxes or penalties.