Tax Refunds Going to IRAs May Cause Snafus

Taxpayers who previously set up their tax refunds to be deposited directly to their IRAs this year will need to be vigilant: Economic Stimulus rebate checks will also be automatically deposited into any IRAs whose owners have set them up to receive tax refunds.

Normally, arranging for your tax refund to go into your IRA directly is a great idea – it protects you from the temptation to spend the refund.  Since most of us practice “mental accounting,” a tax refund that goes directly into our IRA won’t give us the feeling that we’re giving something up to save for retirement.

This year, though, this particular good deed may not go unpunished – a bit.  If your refund is set up to go into an IRA, your tax stimulus check will go there, too.  If the stimulus check pushes you above your allowed contribution for the year, you’ve got a problem.  People whose refunds were set up to be split among multiple IRAs won’t have this problem; they’ll get a rebate check instead of multiple direct deposits.

There is good news, though; the IRS has announced that it will permit funds up to the amount of the rebate deposit to be removed from an IRA without penalty, provided the funds are taken out before April 15, 2009 (or October 15, 2009 if you obtain an extension).  In effect, the IRS will pretend that the deposit and withdrawal never happened.  Your IRA custodian may give you some extra paperwork, and your tax filing instructions will be a trifle more complicated next year in order to explain how to handle the calculations.

About the author

Thomas Fisher, CFP®
Thomas Fisher, CFP®

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