How to Report an IRA Distribution That Was Refunded Within 60 Days
Individual retirement accounts carry special tax benefits, so you generally have to report the movement of money into and out of an IRA. If you take a distribution from your IRA, you have to notify the IRS when you file your taxes. If you return the distribution within 60 days, you want to be particularly diligent about notifying the IRS, because the rapid return of a distribution can work to your advantage.
Report any IRA distribution when you file your taxes by noting it on the appropriate tax form, using information sent to you by your financial institution.
IRA Withdrawal and Repayment Rules
Form 1099-R is the form that financial firms use to report distributions from retirement plans, such as IRAs. If you take an IRA distribution, even if you later return it, the firm maintaining your IRA sends you a 1099-R at year-end showing the distribution. The IRS also receives a copy. The amount of your distribution appears in box 1 of Form 1099-R. However, if you returned the distribution within 60 days, the IRS considers your withdrawal to be a tax-free rollover, even if it was returned to the same account. As a result, box 2 of your Form 1099-R, which is the taxable amount, should be zero.
Before tax year 2018, if you took an IRA distribution, you could not file your taxes using Form 1040EZ, having to use either Form 1040 or Form 1040A instead. However, as of tax year 2018, Forms 1040EZ and 1040A are no longer used, so you will report distributions on Form 1040.
Using the information on your 1099-R, you enter the amount of your total IRA distribution on line 4a of Form 1040. The taxable amount, which should be zero, goes on line 4b. You can generally rollover an IRA to another IRA without tax penalty. To indicate that your returned distribution is technically a tax-free rollover, write the word "rollover" next to the taxable amount on your 1040.
If you don't report your distribution as a rollover, the IRS may consider it a taxable distribution. You'd be in the same tax situation as if you had withdrawn the entire amount and kept it, rather than returning it: you'd pay any federal and state income taxes that apply. If you were considered to be taking an early distribution – you were younger than 59 1/2 – you'd face an additional 10 percent penalty on the taxable portion of the distribution. For these reasons, it's important to verify that your 1099-R is correct when you receive it. You must also follow correct procedures, such as setting up your IRA account before you plan to make the transfer, making the check out to the correct plan trustee and depositing the check within 60 days so when you file your taxes, you will avoid taking an unnecessary hit on your rollover.
60-Day Rollover Rules and Exceptions
Generally, when you're rolling over funds from one IRA to an IRA, you'll only avoid taxes if you redeposit the money within 60 days. If you deposit it on day 61, you'll owe whatever taxes and penalties apply.
But certain exceptions apply if you're forced to hold on to the money longer for circumstances outside your control. For example, if you attempt to deposit the money and the financial institution makes a mistake and doesn't accept the deposit properly, if a family member passes away or is seriously ill, or if restrictions are placed on the funds by a foreign country, you can ask the IRS for an exemption.
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.