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. 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, almost like an IRA loan for 60 days, but make sure you'll have the money to redeposit in time.

Short Term IRA Withdrawal

Normally if you are withdrawing money from an IRA before you're 59 1/2, you must pay income tax on the money plus a 10 percent tax penalty. There are some exceptions for a short term IRA withdrawal that are designed to let you move money from one IRA to another. But you can take an IRA withdrawal and redeposit the money in the same account without penalty if you're careful.

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 or other extenuating circumstances, you can request a waiver to complete the rollover after the 60-day deadline.

You can only make one such rollover in any 12 month period, regardless of how many IRAs you have. This limit doesn't apply to circumstances where you have money sent directly from one IRA provider to another without taking possession of the funds. This is usually a simpler option if you want to move IRA funds to a new bank or brokerage.

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.

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.

Exceptions to Early Withdrawal Penalties

In some cases, you can withdraw money from an IRA before 59 1/2 without a tax penalty, though you'll still owe ordinary income tax on the money itself. If you're a first time homebuyer, you can use up to $10,000 of IRA money towards your home purchase. If you're called up to active duty from the National Guard or military reserves, you can often withdraw IRA funds without penalty.

You can also use IRA money to buy health insurance if you're unemployed without penalty or to pay medical expenses in excess of 7.5 percent of your adjusted gross income. Certain higher educational expenses are also allowed under IRA rules.

Make sure you understand the rules before taking an early IRA withdrawal.

2018 Tax Law Changes

IRA rules aren't changing much for 2018, but the amount of tax you owe on any IRA withdrawal may be lower due to lower tax brackets across the board.

2017 Tax Law

You may owe more tax on IRA distributions in 2017 due to higher tax rates.