If you took an early distribution from your IRA and realize you don't need it, you might be able to put it back if you act fast enough. However, if too much time has elapsed, you're stuck taking a distribution and putting the money back in an IRA will only make things worse.
Typically, you have 60 days to put money you take out of your IRA back into the account to be able to treat it as a rollover. If you do put it back within the time frame, you avoid having it considered a permanent distribution, and therefore avoid any taxes and penalties. What you do with the money within those 60 days doesn’t matter. For example, you may have taken out the money because you were planning to buy a home or a new car, but then decided not to and as long as you return the money to the IRA within 60 days, it receives rollover treatment. However, if the 60-day time limit has run, you’re generally out of luck.
You can’t roll money over from an account that has been part of a rollover within the last 12 months. For example, if you have three IRA accounts, X, Y and Z, and you take a distribution from X and roll it into Y, you could not later take a distribution from X or Y because X had money taken out of it and Y had money rolled into it. However, if you took a distribution from Z, you could roll it into X, Y or Z because Z had not previously participated in a rollover. If you take a distribution from a plan that has already been part of a rollover within the last 12 months, that money is ineligible to be put back into an IRA.
You must report your IRA distributions and re-contributions on your income taxes even if you don’t incur any additional income tax liability. On your tax return, report the total distributed from the IRA as a tax-free IRA distribution on either line 15a of Form 1040 or line 11a of Form 1040A. Then, report the total amount you didn’t put back in time as a taxable distribution on either line 15b of Form 1040 or line 11b of Form 1040A, even if zero. Next to it, write “rollover” so the IRS knows none of the distribution is taxable because you rolled it over.
Putting Ineligible Money Back
If you put money back into your IRA that wasn’t eligible to be rolled over, you’re treated as having taken a distribution and made a separate contribution. The distribution becomes fully taxable and the contribution is subject to your annual contribution limits. If you contribute too much, the excess is hit with a 6 percent additional tax every year until you correct it. For example, if your contribution is $5,000, but you put in $15,000, you would pay a 6 percent penalty on the $10,000 excess contributions penalty.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."