How are same year contributions and deductions from/to IRA dealt with?

[Serge]

Could not find a similar discussion beyond excess contributions.

Here is a case. This is an IRA owned by over 60 year old, so distributions are not penalized. In 2022 the max allowed contribution is $7K.

In May $15K were taken out  as a distribution (not a rollover or conversion). If $20K is put back in Sept in this IRA how is this handled from a taxable view point at year end?

My logic tells me that there would be 20-15 = $5K contribution. 

In short, I am asking if an IRA account when withdrawal are fully allowed, can be transacted like a saving account.

[NCperson]

@Serge - are you working with at least $7,000 of earned income? 

The maximum permitted contribution is the lessor of your earned income or $7,000.

your opportunity to send back the distribution expired 60 days after it was distributed. 

the distribution and the contribution are separate matters -  this is not a saving account.

[Opus 17]

Your logic is incorrect.  The two transactions are entirely independent and governed by difference sections of the tax law.

First, if you withdraw funds, you have 60 days to return them to the same IRA, or to a different IRA.  If you use a different IRA, this would be considered a direct or indirect rollover.  If you keep the funds longer than 60 days, it is a taxable distribution (withdrawal).

Second and completely separately, you can make new contributions up to $7000 or up to the amount of your taxable compensation from working, if it is less than $7000.

A distribution taken in May (let's assume May 15) must be returned by July 15.  You also have to notify the plan when making the deposit that it is a "returned distribution within 60 days" so they don't count it as a new contribution.  The only time you get longer than 60 days is in the case of a "first time home purchase" where you must use the funds within 120 days.  If you withdraw funds for a first time home purchase and the purchase does not go through, you have 120 days to return the contribution.  Not all IRAs are willing to process a 120 return of distribution, so you have to make sure to let them know what you are doing in advance. 

In short, I am asking if an IRA account when withdrawal are fully allowed, can be transacted like a saving account.

Absolutely not. 

[rjs]

Since the $20,000 was put in more than 60 days after the distribution, none of it is a rollover of the distribution. The entire $20,000 is a new contribution. Obviously that is an excess contribution, so you must remove the excess, plus earnings, before the due date of the 2022 tax return. If you do not remove it you will be penalized not only for 2022, but every year that the excess remains in the IRA.

We can't tell how much the excess contribution is, because you have not said how much compensation you have. (Compensation for calculating the maximum IRA contribution is basically income from working.) Depending on your compensation, the excess contribution is at least $13,000 and could be as much as the entire $20,000.

[VolvoGirl]

And if you do put back a withdrawal you need to add back in any withholding taken out from your own money.  Or the tax withholding will become a taxable distribution itself.  So if you took out 15,000 and there was 20% tax withheld of 3,000 you got 12,000.  

[rjs]

You might think that you could use an IRA "like a savings account" as long as you stay within the 60-day rollover window. But there's another limitation, the one-rollover-per-year limitation. When you put any part of an IRA distribution back into the IRA, or into a different IRA, you have done a rollover. You then cannot do any other rollovers until one year after the distribution that you first rolled over. You could take more distributions during the one-year waiting period. Those distributions would be fully taxable. Any money you put into any IRA would be treated as a new contribution, not a rollover.

[Serge]

This is clearly more complicated than I thought. The distributions doesn't seem to cancel the contributions even if done in the same tax year and even if the account is now clear for distributions.

So even if distributions are equal to contribution for a tax year and the contribution is, lets say only $2K, one may be having to pay excess limits penalty if the income is too high to allow a $2K contribution.

Further, I am worried about the 1 time limit "rollover"per year mentioned.  On this topic, does this 1 time per year limit applies to a traditional Roth conversion as well? For instance, converting $5K on February  and another $5K in June to the same Roth from the same IRA: Is this allowed?

[Opus 17]

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@Serge wrote:

This is clearly more complicated than I thought. The distributions doesn't seem to cancel the contributions even if done in the same tax year and even if the account is now clear for distributions.

So even if distributions are equal to contribution for a tax year and the contribution is, lets say only $2K, one may be having to pay excess limits penalty if the income is too high to allow a $2K contribution.

Further, I am worried about the 1 time limit "rollover"per year mentioned.  On this topic, does this 1 time per year limit applies to a traditional Roth conversion as well? For instance, converting $5K on February  and another $5K in June to the same Roth from the same IRA: Is this allowed?

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"The distributions doesn't seem to cancel the contributions even if done in the same tax year and even if the account is now clear for distributions."

Correct.  Distributions and contributions are completely separate, have separate rules, and can't be combined to even each other out. 

"and the contribution is, lets say only $2K, one may be having to pay excess limits penalty if the income is too high to allow a $2K contribution."

Correct, with some modifications.  You can contribute to a traditional (pre-tax) or Roth IRA if you have compensation from working.  If your income is too high to contribute tax-deductible contributions to a pre-tax IRA or a Roth IRA, you can still make non-deductible contributions to a traditional IRA.  This creates a taxable basis in the account which means that a small part of your withdrawals in the future will be non-taxable.  Making non-deductible contributions to a traditional IRA also creates a lot of paperwork because you have to track your basis, and I don't recommend it if you can avoid it, and you should get professional advice.

"Further, I am worried about the 1 time limit "rollover"per year mentioned.  On this topic, does this 1 time per year limit applies to a traditional Roth conversion as well?"

It may.  The once-per-year limit on rollovers only applies to indirect rollovers.  This is where you get a check or electronic funds deposit from plan A, and you must deposit them in plan B within 60 days.  In a direct rollover or direct conversion, plan A sends the money directly to plan B and you do not serve as intermediary. You can do as many direct rollovers--including IRA to Roth conversions--as you like, as long as they are direct plan to plan.