60 day rule question
I have a friend how took out $8000 from his IRA this year when he was waiting to get paid on a job.
He re-paid the $8000 into his IRA within the 60 day window.
Can he take another withdrawal form the IRA this year which he plans on paying back in a month?
Thanks,
Bob
Permalink Submitted by Alan Spross on Tue, 2011-06-21 17:36
No, he must wait 12 months before doing another rollover from the same IRA account. If he has another IRA account, he can do a 60 day rollover from that account if there has not been a rollover from the second account in the last 12 months.
The 12 month period is measured from the date of distribution from the IRA, not the date the money is rolled back into the account.
Permalink Submitted by Mark Atkinson on Thu, 2011-06-23 17:28
As a follow-on question, if he does take a second distribution of, say $10,000, will the entire IRA account be treated as a pre-mature withdrawal or will the amount subject to taxes and the 15% penalty be limited to the second distribution amount of $10,0000?
Permalink Submitted by mk foss on Thu, 2011-06-23 17:56
If in the example, the individual withdrew $10,000 before 12 months had elapsed, he would owe a 10% penalty on the $10,000. Some states (CA for example) also penalize early withdrawals so he could owe a state penalty as well.
If he were to replace the $10,000 within 60 days, he would have an excess contribution that would be subject to a potential 6% penalty if not corrected.
Permalink Submitted by Alan Spross on Thu, 2011-06-23 18:08
The entire IRA would not be considered as distributed, just the 10,000. The early withdrawal penalty would be 10%, not 15%.
However, there are some options to avoid the damage. For example, if the first distribution was 8,000 or otherwise less than the second distribution, the taxpayer could opt to decline rollover treatment of the first distribution and pay the tax on the 8,000. Of course, if that option is elected, then there is an excess contribution of 8,000 made to the IRA and it must be withdrawn with any allocated earnings. This would open up the second distribution of 10,000 for rollover treatment since there would no longer be a prior rollover in the 12 month period. This can save some dollars if the amounts differ by a substantial amount.
Secondly, if the taxpayer catches the second distribution before it is rolled over and realizes that it is not eligible for rollover, he can convert the distribution to a Roth IRA and then later recharacterize it back to the TIRA. This is a work around that is allowed because a conversion or recharacterization does NOT count with respect to the 12 month rollover limitation. This involves some extra transactions and reporting complexity, but will accomplish the goal of avoiding a taxable distribution with early withdrawal penalties.
There are very few, if any, IRS letter rulings regarding this situation, unlike the thousands of rulings with respect to 60 day rollover extensions. This is most likely due to lack of monitoring and reporting of dates of rollovers and the non existent coordination between IRA custodians. Therefore, most of these skate through without recognition that there is even a problem.