Retirement Planning For 30-Somethings: Deposits And Loans
If you make a withdrawal from your retirement account and have the funds available to redeposit, you can redeposit (rollover) the amount within 60-days of receipt. This rollover will restore the amount, allowing it to continue to benefit from the tax-deferred option. Rollovers should be handled with care so as to ensure that no rules are broken, as errors and rollovers of ineligible amounts can result in penalties being owed to the IRS and double taxation of the amount. The following are a few of the rules that should be followed:
The distribution amount that you receive must be rolled over within 60 days of receipt. If you miss this deadline, the amount is no longer rollover eligible, and a rollover of an ineligible amount would result in the amount being treated as ordinary income and subject to removal from the receiving account as a correction. Failure to correct the amount by your tax filing deadline for the year the rollover contribution is made to your IRA (plus tax filing extensions) could result in double taxation and a 6% excise tax owed to the IRS for every year the amount remains in your IRA.
Replacement of Taxes Withheld
If income tax was withheld from your distribution, you will need to make up the withheld amount out of pocket in order to roll over the entire withdrawn amount. If you roll over only the net amount that you receive, the amount withheld will be treated as a distribution that was not rolled over, and treated as ordinary income. In addition, the amount would be subject to a 10% early distribution penalty if the distribution occurred before you reach the age of 59.5, unless you qualify for an exception to the penalty. For example, if you withdrew $100,000 and $20,000 was withheld for income tax, you would need to make up the $20,000 out of pocket in order to roll over the entire $100,000, as the $20,000 would have already been remitted to the IRS as taxes paid on your behalf. If you are unable to make up the $20,000, that amount would be treated as a distribution included as ordinary income and you would owe the IRS a 10% early distribution penalty ($2,000).
Avoid Once-Per-Year Rule
Only one distribution can be rolled over from an IRA during a 12-month period. As such, if you take a distribution from one of your IRAs and rollover that amount within 60-days, you cannot rollover a distribution from that IRA for another 12 months. Failure to follow this rule would result in ineligible rollover contributions to the IRA, which could result in double taxation if not corrected timely and a 6% excise tax owed to the IRS for every year the amount remains in your IRA.
Avoid Taking Loans
If you have assets in a qualified plan, 403(b) or governmental 457(b) plan, you may be able to take a loan from your account balance if loans are allowed under the plan. Generally, loans are limited to the lesser of 50% of your vested account balance of $50,000. Except in cases where the loan is used to purchase your principal residence, the loan must be repaid within five years.
Loans are usually discouraged, because the amount borrowed is not available for investments in your account until repaid. However, loans can be beneficial in some cases, such as if used to consolidate high interest loans. Before deciding to take a loan from your account, have your financial advisor calculate the amount of interest that you would pay and the loss of tax-federal opportunity versus the tax and savings benefits of using the loan amount for the intended purpose.
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