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.
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.
Form 1040 or 1040A
If you take an IRA distribution, you cannot file your taxes using Form 1040EZ. You must use either Form 1040 or Form 1040A. Using the information on your 1099-R, you enter the amount of your total IRA distribution on line 16a if you're using Form 1040, or line 12a if you're using Form 1040A. The taxable amount, which should be zero, goes on line 16b or 12b, respectively. To indicate that your returned distribution is technically a tax-free rollover, write the word "rollover" next to the taxable amount on your 1040 or 1040A.
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 You'd be in the same tax situation as if you had withdrawn the entire amount and kept it, rather than returning it: you'd pay any federal and state income taxes that apply.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.
The IRS doesn't permit borrowing from IRAs. However, you can use IRA rollover rules to take the money in your IRA for up to 60 days, tax-free, once per year. Although the rules were originally designed for the purpose of moving money between two different retirement plans, they still apply if you take money out of one IRA – using it for any purpose – and then return it within 60 days. You'll only avoid taxes, though, if you do replace the money within 60 days. If you return it on day 61, you'll owe whatever taxes and penalties apply.
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