Putting IRA Withdrawals Back Into Your Account

I know that required minimum distributions from IRAs have been suspended for 2009, but I had automatically received my regular IRA payments in a lump sum at the beginning of the year. Can I put the money back into the account so I can avoid paying taxes on it? And what do I need to do about my 2010 withdrawals?

Yes, you can put at least some of the money back into the account if you act quickly. And that could be a good idea if you don’t need the money now and want to avoid paying taxes on the distribution this year.

The IRS recently extended the period during which you can put 2009 distributions back into an IRA without tax consequences. Originally, you had only 60 days after receiving the money to put it back into the account. But now you have until November 30 or 60 days from the time you withdraw the money, whichever is later, to return 2009 money to the account.

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To make it easy to keep track of the time limit, brokerage firm Fidelity is telling customers that if they took RMDs from January 1 to October 1, 2009, they will have until November 30 to roll the money back in. But if they took the withdrawals from October 2 to December 31, they have 60 days to return the distribution.

There is a catch: You are allowed to put one IRA withdrawal back into the account within 365 days. So if you received regular distributions every month, for example, then you can put only one of the withdrawals back in. If you received the money in a lump sum, however, then you can put it all back into the account.

If you had any taxes withheld from the distribution, then you’ll need to put that money back into the account, too; otherwise the amount withheld will be considered a distribution and will be taxed as ordinary income.

For more information about the rules for putting IRA withdrawals back into your account, see the IRS Notice about the new guidance. For more about 2009 RMDs in general, see Who Has to Take an IRA Distribution in ’09 and Wise Moves for a Year With No RMDs. Also see A Break in ’09 for Withdrawals From Inherited IRAs for special rules about putting the money back into an inherited IRA.

Another option: Because you aren’t required to withdraw the money this year, you may want to roll some of it into a Roth IRA. You’ll have to pay taxes when you make the switch, but you can take tax-free withdrawals after five years, you never have to take required minimum distributions, and you can create a tax-free inheritance for your heirs. You don’t need earned income to convert a traditional IRA to a Roth; your adjusted gross income just needs to be less than $100,000 in 2009. That income limit for conversions disappears in 2010. See The New Roth Rollover Rules Explained for more information about rolling over a traditional IRA to a Roth, including details about how to figure out the tax bill.

And you can still make a tax-free rollover from an IRA to a charity in 2009, too. See Making Charitable Contributions From an IRA for details.

Required minimum distributions will resume in 2010, so this is a key time to think about next year’s withdrawals. If you’d like to receive regular payments throughout the year, it’s important to let your IRA administrator know. Depending on how you stopped them for 2009, you may need to fill out new paperwork.

At Vanguard, for example, if you originally signed up for automatic RMDs but had the service suspended for 2009, you should have been offered the option to reestablish the automatic RMDs for 2010. Vanguard will send a RMD statement in January with the details. If you removed the RMD service entirely, you’ll need to sign up again to schedule your 2010 distributions.