If you withdraw money from or completely cash out your IRA, you are required to pay taxes on the amount. Also, you may be required to pay a penalty if you take it out too soon. However, the IRS allows you to deposit the money into another IRA to avoid paying taxes. Rollover rules are strict so be sure to keep records to avoid paying needless taxes.
A rollover is defined as withdrawing money from one IRA account and the depositing the proceeds into another IRA account. The only way to avoid paying taxes on the IRA distribution is to reinvest that money into an account that’s classified as an IRA. If you invest in something other than another IRA, you will still have to pay taxes on the money withdrawn from the original IRA.
Next, you have a 60 day window in which to reinvest the money in the new IRA. Failure to do so will lead to taxes becoming due. There are no rules for what you can do with that money for that time frame. However, you must reinvest all the money back into another IRA or pay taxes on any amount that’s less than the original liquidation. If you need quick cash that you would otherwise have to pay tax or penalties on, this is the way to do avoid that.
You must report your IRA withdrawal (even when rolling over to another IRA) when you file your taxes. The full amount of the withdrawal would go on Line 15a on your 1040. Any amount that was NOT rolled over into a new IRA would be reported on Line 15b. If the full amount was rolled over, then that amount would be zero and there would be no taxes due.
One last thing to point out as the difference between a rollover and a transfer. As we’ve been talking about, a rollover is when you take possession of the money after withdrawing it from your IRA and then depositing it into another IRA. A transfer is when the money never touches your hands and simply goes from the original custodian to the new custodian. Transfers are unlimited but you may only do one rollover per year.
IRA rollovers are a good way to borrow money without having to pay taxes but use them sparingly. The longer the money stays in the account, the more time it has to grow. If you have any questions about this or other retirement related areas, contact the tax experts at the IRA Financial Group.