How to Reinvest in an IRA to Avoid a Penalty
Investing in an IRA means investing in your future, and those who use these accounts to save for retirement are free to invest their contributions in almost any type of investment. However, if the income generated by the investments in the IRA is paid out to the account owner before age 59 1/2, it is counted as an early distribution and assessed a 10 percent penalty. Knowing how to reinvest your investment income will allow you to avoid this problem.
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Things You'll Need
- A means of contacting your IRA custodian (email, phone number, etc.)
- A list of the investments in your IRA (which will be on your latest statement)
Instructions
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Assessing Your IRA Portfolio
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Find your most recent IRA statement and look at your list of portfolio holdings. Some may pay interest while others generate dividends or will post capital gains when they are sold. Mutual funds that invest in stocks will likely pay out capital gains distributions each year around November. Look at the reinvestment option listed for each of them, if this is shown on the statement. Your IRA custodian can also tell you what is being done with your investment income; a phone call or email should quickly produce an answer.
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Tell your custodian that you wish to have all of your proceeds reinvested immediately if that is not being done now. Once this is done, all interest, dividends and capital gains will automatically be used to purchase more shares or units of the underlying investment if this is possible. You also can elect to have the income paid back into the cash account in your IRA if you wish to increase your cash position. In most cases, your custodian will contact you if you inadvertently receive any of your investment income as a distribution, but of course you should also take immediate action and contact your custodian if you receive a check or bank deposit from your IRA that you were not expecting.
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Repeat this process with every traditional and Roth IRA that you own. Some people have many different IRAs scattered about with several different banks, mutual fund companies and brokerage firms. Each one must be contacted in order to ensure that no unintentional distributions will be made from one of the accounts. However, if you have not already received a distribution from any of those accounts, no further action likely needs to be taken. You may want to check each one to make sure that your investment income is being reinvested or paid into the cash account according to your wishes.
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Tips & Warnings
If you receive a distribution from your IRA that you did not request, you may be able to get it reversed if you quickly repay it to the custodian. The financial institution can tell you what its rules are for this situation.
References
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