In life, unexpected events and mistakes happen. Sometimes these can have detrimental consequences on your finances.
One such mistake is accidentally withdrawing money from your Roth IRA. What do you do? Experts say not to panic, as there are a few things you can do to avoid penalties.
“The good news is that you can put the money back in if it is less than 60 days. After 60 days there is a lot of ‘it depends,'” said Bobbi Rebell, CFP, founder of Financial Wellness Strategies and author of “Launching Financial Grownups: Live Your Richest Life by Helping Your (Almost) Adult Kids Be Everyday Money Smart.”
“If the money withdrawn is money you contributed, there will be no penalty,” she said. “The money was put in as after-tax money so you won’t have to pay tax either.”
Rebell noted, however, that for money that is earned in the account, including interest income, dividend income and capital gains “it gets more complicated.”
Don’t Panic but Act Fast
Before panicking, the first step is to find out what part of your Roth IRA you’ve withdrawn, said Andrew Latham, CFP and director of content at SuperMoney.
“Remember, with a Roth IRA, you can withdraw your contributions at any time without penalties or taxes,” he said. “Withdrawing the earnings is another thing altogether since it may be subject to taxes and a 10% early withdrawal penalty. This applies if you’re under 59½ years old or your Roth IRA isn’t at least five years old.”
Understand the 60-Day Rollover Rule
Latham reiterated what Rebell said: If you’ve accidentally withdrawn the funds, the IRS provides a 60-day grace period to redeposit the money into the Roth IRA or another qualifying retirement account without incurring any penalties.
This is essentially treated as a rollover, and you’re allowed one such rollover in a 12-month period across all your IRAs.
He noted, however, that while this is a helpful provision, it’s intended for rare situations.
“Overusing it might flag the attention of the IRS,” he added.
There are also a few caveats and considerations.
The 60-day rule is a firm deadline, and you want to ensure the funds show in the Roth IRA custodial account rather than simply initiating the transfer.
“Don’t wait until the last minute; allow several days for the transfer to be processed ahead of the deadline,” said Peter Hoglund, AIF, CFP and senior vice president at Wealth Enhancement Group.
“If you have previously had an accident or withdrawn and replaced funds from another IRA,” he added, “you cannot do so again, even in accident situations.”
Another tip: Return the funds in a single lump sum, rather than trying to complete transfers from several sources within the deadline.
“A clean transfer back into the account will show best in the banking transaction logs,” Hoglund said, “and the custodian may code just the first deposit as the short-term return of funds.”
Experts recommend you document everything and every step very thoroughly and keep records of the withdrawal and any actions you take afterward.
“If you’re hit with a tax notice or if there are questions about the withdrawal, thorough documentation will be your best friend,” said Jeff Rose, CFP and founder of Good Financial Cents.
It’s also a good idea to consult with your IRA custodian or financial institution about the accidental withdrawal to ensure all paperwork is in order, according to Taylor Kovar, CFP and CEO of The Money Couple and Kovar Wealth Management.
Avoid Future Accidents
One way to go about it is to set up account alerts. As Latham explained, many financial institutions allow you to receive notifications for withdrawals or other specific activities.
Experts also recommend consulting a tax professional, as well as keeping up to date with regulatory changes.
“To prevent accidental withdrawals in the future, consider implementing safeguards or carefully tracking your Roth IRA transactions,” said Mary Seo, district director at Syncis. “Roth IRA rules can change over time, so it’s important to stay up to date with the latest tax regulations and consult a financial advisor or tax expert for personalized advice.”
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