Can IRA Contributions Be Reversed in the Same Year?

An IRA offers both tax benefits and lots of IRS regulations.

An IRA offers both tax benefits and lots of IRS regulations.

Contributions to individual retirement accounts can have many tax benefits, including the tax-deferral of gains and the tax-deductibility of contributions. However, once you contribute to an IRA, you usually can't withdraw it without penalty until you are at least 59 1/2 years old, or only under special circumstances such as needing it for qualified education expenses or if you become disabled. If you change your mind about your contribution for any reason, the IRS also allows you to take it back in the same year if you comply with certain regulations.

Before Tax Return Due Date

The IRS lets you withdraw IRA contributions tax-free if you take them out before your tax return is due. In addition to your contribution, you must withdraw the earnings on your contributions as well. Your IRA trustee or custodian can usually calculate the amount of earnings you need to withdraw. You'll have to pay tax on any earnings you withdraw associated with a returned IRA contribution. If you are under age 59 1/2 at the time of the withdrawal, you typically also have to pay the 10 percent early distribution penalty on your withdrawn earnings.

After Tax Return Due Date

The IRS permits the withdrawal of same-year IRA contributions if made within six months of the due date of a return, without extensions. For example, if you made an IRA contribution in 2011 and deducted it on your 2011 tax return, the six-month window applies. However, you could not withdraw contributions made in 2010 made after the April 15, 2011 tax return date. As with other returned contributions, you must withdraw your earnings as well, with the same tax and penalty ramifications of pre-deadline withdrawals. After your tax return due date, you'll have to file an amended tax return to withdraw your contribution.

Over-contribution Penalty

One reason you may want to withdraw an IRA contribution is if you exceeded IRS contribution limits. As of 2012, you can only contribute up to $5,000 per year to an IRA or the amount of your taxable compensation, whichever is less. If you over-contributed, you will face a penalty of 6 percent of the amount of your over-contribution. This tax will be incurred annually until you withdraw the excess contribution.

Recharacterizations

If you want to move your IRA contribution from one IRA to another, you can recharacterize it rather than withdrawing it. For example, if you made a contribution to a traditional IRA but instead wanted to contribute to a Roth IRA, you can transfer the contribution from your traditional to your Roth IRA. You still must pay income tax on any earned income you transfer, but you do not have to pay any early withdrawal penalties if they would otherwise apply. In the case of a Roth IRA, you would also not be able to take a tax deduction for the recharacterized contribution, as a Roth IRA is an after-tax investment account.

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