How Do I Replace a Withdrawal From an IRA?

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Under IRS rules, individual retirement accounts provide a tax break for retirement savings. There's a limit on the amount you can contribute to an IRA each year: $5,500 as of 2015, plus an additional $1,000 "catch-up" contribution if you're over 50. The tax law strongly discourages early withdrawals of savings by imposing a10 percent penalty on any distributions taken before you reach the age of 59-1/2. This rule applies to traditional as well as Roth IRA accounts. Fortunately, there is a short window available that lets you return any early distributions to the account and avoid the penalty, as well as any income taxes that might be due.

Withdrawals and Returns

Normally, drawing down funds from an IRA is a simple matter of notifying your account custodian and requesting a check or an electronic bank transfer. If you return those funds to the same account, or roll them over to a different qualified IRA within 60 calendar days of the distribution, then no penalties or taxes apply. You replace the funds by having them in the hands of the custodian before the 60-day deadline.

One-Time Rollover

The IRS terms the replacement of funds a "rollover" whether they go into the same or a different IRA account. The replacement of IRA funds penalty-free on an early-distribution basis can be done only once in a 365-day period. This rule prevents you from using your IRA as an interest-free revolving credit account, and will also save you and your custodian quite a bit of paperwork and tax-form headaches.

Penalty-Free Withdrawals

You can withdraw funds without penalty for certain qualified purposes, such as buying a first home, paying for educational expenses, and paying medical bills over a certain percentage of your adjusted gross income. These funds can be replaced after the 60-day window closes without a penalty. However, if you don't replace them, income tax may be due on the original contribution amount as well as the account earnings. The IRS also allows early withdrawals if they're part of regular distributions taken on a schedule based on your life expectancy.

Reporting Distributions

Distributions from IRAs are reported by the account custodian on Form 1099R. Box 1 on this form shows the total amount and Box 2 the taxable amount. In Box 7, the form shows the nature of the distribution with a numeric code: 1 for a standard early distribution, for example; and 2 for an early distribution with an exception. If you've taken an early withdrawal and then replaced it, check this form carefully to ensure your custodian has not reported a taxable distribution from your IRA.

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