The tax implications of taking a distribution from an IRA can be significant. In most cases, these distributions are considered to be ordinary income, taxed at your ordinary income rate, and may also be subject to an early, ten percent, penalty.
One way to avoid the taxes and penalties is to utilize what is called a 60 day rollover. The IRS allows you to take a distribution from your retirement account and, if you return the money within 60 days, it will be considered an “indirect rollover” and not a distribution. Therefore, no additional taxes or penalties come into play.
Here is how it works:
Step One
Let’s say you decide to take a distribution from your IRA and have 20% ($2,000) taxes withheld. This leaves you with a check for $8,000.
Step Two
At some point within the next 60 days, you decide to return the money to the account. The important thing here is that the entire $10,000 must be returned to the account. The taxes withheld, in the amount of $2,000, must be returned in order to complete the rollover. At this point, you have completed the rollover.
Step Three
In the first quarter of the next calendar year, you will receive a 1099-R. The 1099-R reports all distributions from retirement accounts. This would be used to report the distribution as a rollover on your tax return.
Beginning after January 1, 2015, you can only make one rollover from an IRA to another (or the same), in any 12 month period, regardless of how many IRS’s you own. All IRA’s are treated as one for the purpose of the one year limit.
Source: IRS.gov