Your retirement investments, such as IRAs, are meant to serve you in your golden years and aren’t designed as a convenient place to sock away money for a short period. To encourage saving, the Internal Revenue Service (IRS) penalizes investors who receive distributions from their IRA before they reach age 59 1/2. While this helps deter investors from casually withdrawing funds from a qualified retirement account, it also raises hurdles if you want to manage your funds. If you seek to reinvest your IRA into a similarly qualified fund, you must follow IRS regulations to avoid accidentally incurring penalties.
1. Determine if the type of retirement account into which you plan to reinvest your IRA funds can accept assets rolled over from an IRA. Although some types of post-tax retirement accounts, such as Roth IRAs, can accept funds reinvested from your IRA, reclassifying the assets from a pre-tax to a post-tax account may trigger taxation on the amount reinvested.
2. Notify your brokerage that you intend to close your original IRA, and close the account. Temporarily place the assets in a bank until you locate a new retirement account in which to deposit them. In some instances, your broker will automatically withhold the 10 percent early withdrawal penalty for nonqualified distributions when you close your IRA. If it does, make sure to claim the amount on your Form 1040 as a credit if you properly roll over your IRA, by claiming it as additional tax paid in the year.
3. Receive the funds and begin the process to reinvest your IRA assets into a new retirement account. The IRS allows you to hold the rollover assets for 60 days before you reinvest them, but it treats the distribution as a regular, nonqualified distribution if you hold onto the funds longer – meaning you’ll be responsible for a 10-percent early distribution penalty as well as income taxes on the amount you receive. Open the new IRA or retirement account with a new brokerage to complete the reinvestment process.
4. Receive paperwork from the brokerages with regard to your reinvested IRA. You should receive a 1099-R, which reports the money you received when you closed your IRA, from the original brokerage. You'll also receive a Form 5498 from the new brokerage, which reports the investment into a retirement account. Even if you reinvested the full amount within the allotted 60-day window, you must report both transactions to the IRS on your Form 1040.
5. Pay any taxes if applicable. If you reinvested your IRA into another IRA or other form of traditional IRA -- SEP IRA, 401(k) or another pretax account -- you won’t owe taxes on the reinvested amount. If you rolled over funds into a Roth IRA or a Roth 401k, you’ll owe income taxes on the amount rolled over. If you use funds from the IRA to pay the taxes when you reinvest it, the IRS assesses an early distribution penalty on the funds as well, so pay taxes using other assets to avoid additional penalties.
- In many cases, your brokerages may accept trustee-to-trustee transfers, directly moving your IRA assets from one brokerage to another without ever allowing the assets to enter your hands. This move eliminates most of the tax documentations involved in the process.
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