Can You Withdraw Money From an IRA if You Replace It?

Unlike employer-sponsored retirement plans, the Internal Revenue Service prohibits you from taking a loan from your individual retirement arrangement. However, as long as the distribution isn't a required minimum distribution or a return of excess contributions, you can redeposit the money tax-free within specified time limits. You could even use a rollover as short-term financing, but make sure you'll have the money to redeposit in time.

Time Limits

You have 60 days from the time that you take a distribution from your IRA to replace it, either into the same account or into another qualified retirement account. For example, say you take out $10,000 from your IRA on Aug. 1, to avoid having the IRS treat it as a permanent distribution, you need to put that money back into the IRA before Sept. 30 to complete the rollover. If you miss the deadline, you’re usually out of luck. However, in extreme circumstances, such as when the rollover isn’t completed in time due to an error by your bank, you can request a waiver to complete the rollover after the 60-day deadline.

Multiple Rollover Limits

Once an IRA is involved in a rollover, either by taking a distribution from it or rolling money into it, you must wait at least 12 months before you can withdraw money from the account and replace it again. For example, say you have multiple IRAs, one at Bank A, one at Bank B and one at Bank C. If you roll over money from Bank A to Bank B, you can’t replace a future distribution from either of those accounts for 12 months. However, you could replace a distribution taken from your IRA at Bank C.

Withholding Pitfalls

When you take a distribution from your IRA, the bank withholds money for the income taxes you would owe on the money if you didn’t roll it over. However, you’re still responsible for replacing the entire amount within 60 days, not just the amount you received. To do so, you’ll have to use funds from another source, such as your savings or checking account, to avoid taking a partial withdrawal. For example, say you took out $15,000 and $1,500 was withheld for income taxes. Even though you only received $13,500, you need to deposit $15,000 back in the IRA within 60 days. If you only deposit the $13,500, the last $1,500 is treated as a distribution.

Tax Reporting

Even though you won’t owe any taxes on money you take out and put back in the same account within 60 days, you still need to report it on your taxes. Only forms 1040 and 1040A have the required lines. On Form 1040, write the total withdrawal amount on line 15a, the total taxable amount -- zero as long as you complete the rollover -- on line 15b and “rollover” next to line 15b. On Form 1040A, write the total withdrawal amount on line 11a, the taxable amount -- zero as long as you complete the rollover -- on line 11b and “rollover” next to line 11b.

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