After Liquidating an IRA, Can It Be Reinvested Elsewhere to Avoid Taxes?

by Tim Plaehn
A liquidated IRA must be invested in another IRA to avoid taxes.

If you cash in or withdraw the money from a traditional IRA, you are required to pay income taxes on the withdrawal and possibly pay an additional tax penalty. However, the tax rules allow you to deposit that money into another IRA to avoid the need to pay taxes. The rules to roll over IRA money are strict; keep records to avoid paying unnecessary taxes.

IRA Rollover

The act of withdrawing money from an IRA account and then depositing the proceeds into another IRA is called a rollover. The only way to reinvest money you have taken from an IRA and avoid the taxes is to have the new investment be classified as an IRA. Reinvesting IRA proceeds into an investment or account that is not set up as an IRA will not get you out of paying taxes on the IRA proceeds.

Time Frame

Once you have liquidated your IRA and received the money, you have 60 days to deposit the proceeds into another IRA. You can actually use the IRA money any way you want for the 60 days, as long as the money is eventually deposited before the 60 days pass. If you only put a portion of your IRA withdrawal into another IRA, you must pay taxes on any amount that was not reinvested. The 60-day window gives you some flexibility if you have a short-term need for some cash.

Tax Reporting

You must report your IRA liquidation or withdrawal even if you roll the money over to another IRA. The full amount of the liquidated IRA is reported on line 15a of Form 1040 or 11a of Form 1040A. Any portion of the IRA withdrawal that was not rolled into a new IRA goes on line 15b or 11b. If your entire liquidated IRA went into another IRA, this value will be zero and there will be no tax consequences for your IRA rollover.

Transfer vs. Rollover

There are two ways to move money from one IRA to another. A rollover happens if you temporarily take possession of the money. The other alternative, a transfer, causes the IRA funds to go directly from one IRA custodian to another. You can do as many IRA transfers as you want, but you can only liquidate the account and roll over your IRA money only once a year.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

Photo Credits

  • Keith Brofsky/Photodisc/Getty Images