60-Day “Borrowing” From an IRA

Question

In brief, I am projecting out a budget for a personal construction project I am having done, and the numbers are very tight. I have some buffer built in, but if I exceed the buffer amount and my cash flow is restricted (e.g. my clients pay late, etc.), I will need some sort of short term bridge loan. This is about six month down the road, but I am trying to understand my options before wading in.

From Publication 590 it sounds like I can withdraw money ostensibly for the purpose of rolling the money into a new account, but can return the money within 60 days with no penalty. Am I understanding this correctly?

Note that I would not consider this unless I feel 100% confident that I could pay the money back within the 60 days.

Given all of this, am I understanding the rollover rules correctly? Any other pitfalls I would need to be concerned about?

Answer 1

You read it right. Todd's warning is well taken.

I don't know the numbers involved, but have a brilliant suggestion that may help. A Solo 401(k) is simple to qualify for. Any bit of declared side income will do. Once the account is set up, a transfer from IRAs is simple. The Solo 401(k) can offer a loan provision as any other 401(k), and you can borrow up to 50% (max of $50K) for any reason with a 5 year payback. The standard rate is Prime+1%, the fee is minimal usually $50-$100.

All the warnings of IRA 'loans' apply, but the risk of job loss (the largest objection to 401 loans) isn't there. The fact that you have 6 months to set this up is part of what prompts this suggestion.

Note: Any strategies like this aren't for everyone. There are folk who need to access quick cash, and this solves the issue in two ways, both low rate and simple access. Phil already stated he is confident to return the money, the only thing that prompted my answer is there's real risk the 60 days a bit too short for any business deal.

Answer 2

The Tax Court ruling Todd mentioned was that you can only do one roll-over in a 12-months period. I.e.: if you have already done a roll over (even if it is between different accounts) - you cannot do it again between any of your IRA accounts for 12 months.

So for the "60-days loan" trick to work you must ensure that:

1. You haven't done a roll-over within the last 12 months; and

2. You're not going to do a roll-over within the next 12 months.

Note, that the Tax Court took into the consideration that the IRS pub. 590 was explicitly saying that you can do multiple roll-overs as long as different accounts are involved. The Court ruled, that the IRS instructions are NOT a legal authority. I.e.: the IRS can write in the instructions whatever they want, but if it contradicts the law (as it did in this case) - the law always prevails.

This is only for indirect rollovers (where you actually get the money and then re-deposit it within 60 days), trustee to trustee rollovers are not limited.

This limitation is codified in 26 U.S. Code § 408(d)3(B).

Answer 3

Besides what others have mentioned, another thing to watch out for is the tax withholding on withdrawal. If it's a Traditional IRA, they will probably withhold a certain percentage on non-qualified withdrawals. I am not sure if you can ask them not to withhold.

I don't remember the percentage, and it varies by state, but let's assume it is 20%. That means that you only receive 80% of the withdrawal amount when you take it out. However, when you deposit the money to complete the "rollover", you need to give them 100% of the withdrawal. That means (assuming the 20% withholding) you need to fork out cash equal to 125% of what you received in cash, within 60 days! That's like several hundred percent APR and hard to meet unless you are certain of receiving a large payment within the time period.

And if you forget about this, and you just deposit the same amount that you received (80% of the withdrawal), the remainder (20% of the withdrawal) will count as an early withdrawal, with all the taxes and penalty.

So what happens to the 20% withheld that you never received but had to pay anyway? Well, the government has it. It will count as tax paid on your tax return, so it will increase your refund/decrease the amount you owe, but that means you are out that money until tax time! (Unless you decrease the withholding on your salary in the rest of the year to compensate.)

If it's a Roth IRA withdrawal on the contribution, there is generally no withholding, so you don't have to worry about the above. (But there is no penalty on withdrawal of Roth IRA contribution anyway.)

Answer 4

I am a CPA. Yes you can do what you are contemplating. Be careful that they do not take any taxes out of the money when you go to do the "rollover". If they do you will have to dip into your own pocket to put that back into the IRA.