How to Reinvest in an IRA

Reinvesting in an IRA takes two different forms. Some investors have stocks, bonds or mutual funds paying dividends and they wish to reinvest the proceeds. Others have money outside of an IRA that they’ve withdrawn and would like to reinvest back into the IRA tax shelter. Both of these are worthy goals. Placing more money inside an IRA enhances your use of a beneficial tax shelter. If done promptly, you might avoid IRS penalties. Nonetheless, reinvesting dividends will help your money continue earning money on your behalf.

Step 1

Find out how much more you can contribute to your IRA. If you’ve invested in an IRA, withdrew funds and need to reinvest dollars, you’re allowed to replace your entire withdrawal if you do so within 60 days. You can also replace any money that you withheld for tax payments since there won’t be a tax penalty and the government will consider your short-term withdrawal as a rollover. If you’ve passed the 60-day deadline, you can only contribute up to the maximum allowable amount for that year. In 2010, that’s $5000 for people under 50 and $6,000 for people age 50 and above.

Step 2

Verify that your income is below the allowable limit to deduct reinvested money in a Traditional IRA. If neither you nor your spouse has a retirement plan at work, you may deduct your IRA. As of 2010, if you are single or filing taxes as head of the household, have a workplace retirement plan and your adjustable gross income (AGI) is below $56,000, you can contribute the full amount to an IRA. However, if you’re filing a joint return with your spouse, your AGI cannot exceed $89,000 if you want to take the full deduction. If your spouse has a workplace plan, the maximum combined AGI increases to $167,000; anything less than that entitles you to take a full IRA deduction.

Step 3

Verify that your income is below the allowable limit to reinvest or withdrawn Roth IRA contributions. The IRS doesn't recognize reinvested money as replacement funds after 60 days, but as new contributions. To add to a Roth IRA, your AGI must be under $167,000 to contribute the full amount if you’re married and filing jointly; single-filers must earn under $105,000 AGI.

Step 4

Fund your IRA and reinvest the proceeds once dollars arrive inside the account. Your broker will count reinvested money into the IRA as new dollars, so expect to pay commissions or sales charges as if you were purchasing for the first time. Some mutual funds have breakpoints that lower purchase costs to persons with large investments in a fund family. Ask about those if you have considerable assets in a single mutual fund brand.

Step 5

Call your IRA trustee about reinvesting dividends inside of your account. If you wish to change your investments inside of your IRA to reinvest dividends, simply ask your broker to change your account to automatically reinvest dividends. Nearly all mutual funds allow investors to reinvest dividends paid from the fund. Many major brokerage firms allow individuals holding stocks and bonds to reinvest dividends for free or for a nominal charge. s

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