Economic Stimulus Payment Directly Deposited into IRA Accounts?

Then, are you going to use it?

I didn’t know until yesterday after reading an article on MarketWatch that IRS can actually deposit the economic stimulus payment directly into tax-sheltered accounts such as IRA and Roth IRA (well, we are still waiting for the check to come, which is supposed to be later this month). The article, The do’s and don’ts of withdrawing stimulus payments from an IRA, gives some ideas on what to consider before taking the “found money” out of the retirement account.

From what I read, it seems that most people will use the money, assuming it’s deposited into a bank account, to reduce debt or pay for daily expenses as the cost of living keeps going up. The money indeed helped the economy. A report released today shows that retail sales in May rose an unexpected full percentage point (Bloomberg), fueled tax rebate checks being sent to taxpayers at the end of April. But withdrawing money from an IRA account isn’t as easy as writing a check or hitting the ATM machine. Though IRA has said withdrawing the stimulus payment from an IRA account is free penalty, the extra steps needed should make everybody who selected to deposit the money in retirement accounts think twice unless “you absolutely must or you are sure it makes good financial sense,” says the article.

So what if the money stays in the IRA for its ultimate goal: retirement. I ran a quick calculation on what that $600 (individual) or $1,200 (couple) will look 10, 20, 30 years later if the money isn’t removed now. At a reasonable 8.00% annual return, the stimulus money will become a big pile of cash:

Payment 10 Years 20 Years 30 Years
Individual ($600) $1,295.35 $2,796.57 $6,037.59
Couple ($1,200) $2,590.71 $5,593.15 $12,075.19

Even at a moderate 5.00% annual return, the difference is still quite significant:

Payment 10 Years 20 Years 30 Years
Individual ($600) $977.34 $1,591.98 $2,593.17
Couple ($1,200) $1,954.67 $3,183.96 $5,186.33

So if the money is already in your IRA account, are you going to take out to help the economy? Or are you going to let it stay there to help your future?

Withdraw the money unless “you absolutely must.”

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2 Responses to “Economic Stimulus Payment Directly Deposited into IRA Accounts?”

  1. Sun |  Jun 13, 2008 at 9:35 am

    Steve: Thanks for pointing it out. Yes, the calculation for 20- and 30-year were wrong because the number shifted a little bit in my Excel spreadsheet. I have corrected the numbers (not that great now :) but still good to make the point).

  2. Steve |  Jun 13, 2008 at 9:20 am

    Your math is way off for every entry in the 20-yr and 30-yr spaces.