Taking a distribution from your IRA is a big deal from a tax perspective, with a potential impact on your taxable income and with penalties applying for certain types of distributions. Inevitably, some people change their minds about having taken IRA distributions and would prefer to put the money back in their retirement account. Under some circumstances, you can put money back into an IRA, but the rules are quite strict.
If you're new to IRAs, check out our IRA center to learn more about all the ins and outs of these investment vehicles. Otherwise, let's look more closely at what are known as the rollover provisions for IRA distributions and how they affect your ability to put money back into a retirement account.
IRAs and rollovers
The tax laws recognize that retirement savers will sometimes want to transfer funds from one financial institution to another. To do so, you can do either a direct transfer or a rollover. In a direct transfer, the money goes directly from one institution to the other without your ever taking possession of the funds. But in a rollover, your current institution sends the funds to you, and then it's your job to get that money to the new institution.
The rollover rules give you 60 days from the date of the distribution to get that money into the new account. But they also allow you to redeposit the money back into the existing IRA, acknowledging the fact that IRA accountholders will sometimes change their minds about a provider switch.
As a result, if you can fit within the 60-day rollover window, you can simply redeposit the full amount of the distribution back into your IRA. You'll be treated as if you had never taken the money out, and you won't owe taxes on the funds. You will have to report the transaction on your tax return, but you won't report any taxable income as a consequence.
Rules to follow with rollovers
There are a couple of other rules that can apply in certain situations. First, if you're 70 1/2 or older and have to take minimum distributions from your IRA, you're not allowed to roll over that required minimum distribution. If you do, it will be treated as an excess contribution to the IRA, and you'll owe a 6% annual penalty each year that the money remains in the account.
Also, there's a limit of one rollover per 12-month period. Due to a recent court ruling, this limit applies across all of your IRAs, so you can't do a rollover from one IRA and then use a second IRA for a future rollover without complying with the 12-month rule.
For the most part, you shouldn't take distributions from an IRA until you absolutely need them. The rollover rules give you a chance at getting distributions back into your IRA before it's too late.
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