If you ran into hard financial times, you may have felt forced to take an early IRA withdrawal. However, if you have a reversal of fortune, you can put the money back into the IRA if you act fast. By doing so, you avoid the taxes and potential penalties that you'd owe if you kept the distribution.
Treated as a Rollover
When you take an early distribution from an IRA, you don't specify it as a "hardship withdrawal" because technically you can withdraw the money from the IRA at any time, for any reason. If you decide you want to put the money back, you have to act fast. According to IRS Publication 590, if you can put the money back in the IRA within 60 days, it is treated as a rollover. However, if more than 60 days have passed since you took the distribution, you're out of luck.
You can only start one rollover from an account per 12 months. In addition, you can't roll over money from an account if you've deposited a rollover into that account during the past 12 months. For example, if you have three traditional IRAs and you roll money from the first into the second, you can't roll over a distribution from the second IRA within the next 12 months. However, if take a distribution from the third IRA, you may roll it over into any of the three IRAs.
If you try to redeposit your IRA withdrawal after 60 days have passed, it will count as your annual contribution to the IRA. If your contributions exceed the annual limit, any excess contributions are subject to an extra 6 percent penalty. The penalty continues each year until you correct the excess. For example, if your annual contribution limit is $5,000 and you try to redeposit $9,000, assuming you haven't made any other IRA contributions during the year, you're $4,000 over the limit so you have to pay a $240 penalty.
If you are able to redeposit the hardship withdrawal from your IRA, you still have to report it on your taxes even though you won't incur any extra taxes. To report a rollover, you have to file either Form 1040 or Form 1040A. On the return, report the amount of the distribution as a nontaxable IRA distribution. Then, assuming you redeposited the entire amount, enter "0" as the taxable IRA distribution and write "rollover" next to it.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."