Distribution (loan) Before 59 1/2

[Guest oldman74]

If I take a distribution before 59 1/2 and repay it within 60 days, there is no penalty. How is the transaction handled when I pay it back so it isn't considered a contribution for the year? Does the broker simply show it repaid and not reported to IRS?

[masteff]

Distributions and loans are two separate things.

You refer to the 60-day rule, so I assume you're looking at a distribution. The 60-day rule is to do a rollover. You have to deposit the funds as a rollover to avoid it being taxable to you. What would happen is 1) you'd receive a 1099-R showing the distribution, then 2) you'd complete your 1040 tax return showing that you did the rollover.

Note that 20% will be withheld from the distribution and you will have to come up w/ this 20% out of pocket to fund the full rollover. Otherwise, if you only deposit the 80% that was paid to you, then the 20% is taxable. If you fund the full rollover, you would get the 20% withheld back on your tax return (it would go on the same line as other withholding, like from your paycheck).

You might read IRS Pubs 575 and 590.

http://www.irs.gov/pub/irs-pdf/p575.pdf

http://www.irs.gov/pub/irs-pdf/p590.pdf

[ERISAnut]

The 20% withholding does not apply to IRAs, only qualified plans.

[Bird]

From the way this was phrased, I'm guessing it's an IRA, so there would be no withholding. As noted, the reason this is permitted is that you have 60 days to complete a rollover; the idea being that typically you are moving from one financial institution to another but you can indeed use this to some slight advantage as a 60 day "loan" and roll it back to the same institution. The institution will report it as a distribution, and as noted, you must report it as non-taxable since it was rolled over. When you re-deposit the money, make sure they know it is a rollover; they do report that too so everything you report should be confirmed by forms the IRS receives independently from the institution.

[Guest oldman74]

From the way this was phrased, I'm guessing it's an IRA, so there would be no withholding. As noted, the reason this is permitted is that you have 60 days to complete a rollover; the idea being that typically you are moving from one financial institution to another but you can indeed use this to some slight advantage as a 60 day "loan" and roll it back to the same institution. The institution will report it as a distribution, and as noted, you must report it as non-taxable since it was rolled over. When you re-deposit the money, make sure they know it is a rollover; they do report that too so everything you report should be confirmed by forms the IRS receives independently from the institution.

Yes it is an IRA and the withdrawl (distribution) was only intended to be used as a loan and not rolled over because it will be paid back within 60 days. I think you have explained it. Thank you.

[Guest Sieve]

A few tips . . .

The IRS doesn't like these tax-free loans with IRA $$, and there are special rules relating to whether you can repeat this performance again within the next 12 months. Make sure you check those out before you decide to take another interest-free "rollover loan" from the same IRA. You should be able to find them in Pub 590 posted by masteff.

Even though you intended this distribution as a loan with a payback to the IRA, as Bird points out the IRA custodian will report this to the IRS as a distribution. When you pay back the loan, it is, in fact, a rollover, and you must make certain that you enter it properly on your 1040 so that it is treated as such and is not a taxable IRA distribution.

[Guest oldman74]

A few tips . . .

The IRS doesn't like these tax-free loans with IRA $$, and there are special rules relating to whether you can repeat this performance again within the next 12 months. Make sure you check those out before you decide to take another interest-free "rollover loan" from the same IRA. You should be able to find them in Pub 590 posted by masteff.

Even though you intended this distribution as a loan with a payback to the IRA, as Bird points out the IRA custodian will report this to the IRS as a distribution. When you pay back the loan, it is, in fact, a rollover, and you must make certain that you enter it properly on your 1040 so that it is treated as such and is not a taxable IRA distribution.

What if you repeat the withdrawl "rollover loan" in less than 12 months? Is there more than another 10% penalty? If this second rollover is too late to avoid, can you not rollover back?

[masteff]

See IRS Pub 590, page 25, "Waiting period between rollovers".

http://www.irs.gov/pub/irs-pdf/p590.pdf

The waiting period is not optional. Their use of the word "cannot" is absolute.

Without digging into the code and regs, I'd guess it makes the whole amount taxable, subject to both ordinary income tax and the early withdrawal penalty.