How to Reverse an IRA Distribution

Procured through a bank, credit union, investment firm or brokerage, an individual retirement account (IRA) is a tax-advantaged savings instrument designed for the long-term accumulation of funds. Because of this purpose, monies are, as a rule, prohibited from withdrawal until the account holder reaches the age of ​59 1/2​. With traditional IRAs, contributions can be deducted from taxable income, while with Roth IRAs, by contrast, distributions are immune to taxation.

Unlike 401(k) accounts, IRAs need not be obtained through an employer. Some account holders prefer to delay or even reverse IRA distributions for any number of reasons.

Basically savings accounts for retirement, IRAs are financial repositories whereby holders make regular contributions. The institutions managing the accounts invest the contributions in stocks, bonds, mutual funds and exchange-traded funds (ETFs) that slowly grow the value of the IRAs. Moreover, there are IRA products that allow the customer to direct the investments.

Worth noting is the fact that IRA contributions must be from a specified number of sources, wages or self-employment income, for example, excluding origins like child support or Social Security payments. Most IRA products place a cap on how much money can be contributed annually.

Whereas no funds can be removed from the account until age ​59​ ​1/2​, by age ​72​.&text=If%20you%20reach%2070%C2%BD%20in,reach%20the%20age%20of%2072.)​,​ at or about, the IRA holder must begin receiving distributions from the account. Taking money out prematurely will earn the investor a ​10 percent​ penalty and, with a traditional product, income taxes on the withdrawn funds in addition. Yet there is a way to correct an early extraction of IRA funds and save yourself the financial pain. Your repentance must be swift but it can bypass the hefty fees and taxes associated with the untimely removal of IRA assets.

Can you reverse an IRA withdrawal once initiated? The answer is yes and no. No, in the sense that the distribution can not go back to the IRA from whence it came. Still, you can functionally send the payment to another IRA. The Internal Revenue Service (IRS) makes provision for this by allowing "rollovers."

Of course, IRS rules are many and complicated. The agency has parameters regarding what kinds of IRAs you can roll over from and to. The point, nevertheless, is that you can roll over a distribution into another IRA rather than receiving the money directly. There are three methods for accomplishing this.

With a direct rollover, the account holder makes a request of the retirement plan administrator to make the distribution directly from the plan into an IRA or a similar retirement plan. The administrator will need detailed instructions and contact information from the stewards of the receiving plan. Funds might be electronically transferred or the first bank may simply cut a check in the name of the second bank. Either way, the account holder's participation is minimal.

Similar to a direct rollover, trustee-to-trustee transfer is narrowly focused on the institutions holding the IRAs. This type of transfer applies only to IRAs and does not embrace other retirement plans.

Of course, after a customer receives the distribution check, it is too late for any kind of direct or institutional transfer. All is not lost, however. The recipient of the money has a ​60​-day window in which he or she can deposit all or part of the distribution into another IRA or allowable retirement plan.

Nevertheless, certain rollovers are permitted only once per year while others are allowed more often. IRS.gov publishes the relevant restrictions and exemptions.