Even though individual retirement account (IRA) money is meant to be held until you retire, borrowing from the account isn't out of the question. In particular, it is possible to make a withdrawal from your Roth IRA and put the funds back without tax consequences or penalties—but only under certain circumstances. If you are considering doing so, make sure to understand and abide by the following rules.

Key Takeaways

  • You can put funds back into a Roth IRA after you have withdrawn them, but only if you follow very specific rules.
  • These rules include returning the funds within 60 days, which would be considered a rollover.
  • Rollovers are only permitted once per year.

A Tale of Two Distributions

There are two different types of distributions or withdrawals from a Roth IRA. The first type is a qualified distribution. According to the IRS guidelines, a withdrawal counts as qualified if the account is at least five years old, and as the account-holder:

  • You are over the age of 59½.
  • You become disabled.
  • You are buying a home for the first time.
  • You die, and your beneficiary makes a withdrawal from the account.

Withdrawals that don't fall into these categories are called non-qualified distributions. So what does it matter what type of distribution you make? In a nutshell, qualified distributions are income tax and penalty-free. Non-qualified distributions are not.

Taxes and Roth IRAs

Now, you can withdraw any of your contributions from your Roth IRA without penalty and tax implications at any time and at any age. You have this privilege because deposits to Roth IRAs are made with after-tax dollars. Where the qualified or non-qualified status applies is primarily with withdrawals of any earnings the account has generated—interest income, dividend income, capital gains. Earnings are generally not considered withdrawn until a sum equal to the total contributions are vacated from the account.

Now, earnings withdrawals are considered qualified—that is, not subject to income tax or an early distribution penalty of 10%—as long as you meet at least one of the conditions listed above.

Eligible amounts that are rolled over from another tax-deferred within the 60 days are also free of any taxes or penalties. This is often referred to as the 60-day rule, and it applies even if the amount is a non-qualified distribution.

Withdrawing and Returning Roth Funds

Those 60 days also come into play if you want to re-deposit withdrawn funds. According to the IRS, you can make a tax-free withdrawal of some or all of the money in your Roth IRA as long as you put the money back into the same Roth IRA (or actually, into a traditional IRA) within 60 days. This is called a Roth IRA rollover.

Roth IRA Rollover Rules

Taking funds out of your Roth IRA and putting them back may sound like a loan, which the IRS prohibits. Technically, it isn't a loan if it falls under IRS provisions that allow rollovers.

You can roll over the amount you withdrew to the Roth IRA, or another of your Roth IRAs—excluding inherited Roth IRAs—if the following conditions are met:

  • The funds are rolled over within 60 days from when you received them.
  • The Roth IRAs were not involved in a rollover during the 12 months preceding the date of the distribution.

The last requirement is because a Roth IRA can be involved in a rollover only once during a 12-month period. This rule applies to traditional IRAs as well.

The 12-month rollover rule does not apply to Roth IRA conversions from other types of IRAs.

Another rule to be aware of in this situation is that you cannot roll the amount over to your Roth IRA if you are the spouse of an account-holder—unless you are rolling over an inherited IRA.

Special Considerations

As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, meant to provide economic relief amid the COVID-19 pandemic, certain temporary changes have been put into place for the tax year regarding retirement plan withdrawals and tax liability.

Any changes apply to what the law considers to be an eligible participant, namely, a person who has been diagnosed with COVID-19, has a spouse or dependent diagnosed with COVID-19, or has experienced a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19.

Eligible participants can take an early withdrawal of up to $100,000 from 401(k)s, 403(b)s, 457s, and traditional IRAs without paying a 10% penalty. An individual has up to three years to pay the taxes on the early withdrawal or to redeposit the money back into their retirement account (versus the standard repayment requirement of 60 days). Roth IRAs are funded with after-tax money, so there are no taxes due on the contributions, but the earnings on the contributions are taxed.

Retirement plans are not required by law to accept this modification of early withdrawal rules, but most plans are expected to follow suit. The law covers withdrawals made between January 1, 2020, and December 30, 2020.