Think Twice Before Using Your IRA For Quick Cash
By Sarah Brenner, IRA Analyst
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If you or a family member encounter financial trouble, you may think that your IRA is a good resource to get you through the crisis. Be careful! While some company plans allow for loans, loans are not allowed from an IRA. To get around this rule, some taxpayers take IRA distributions to get quick cash and figure they will have resources to roll over the distributed amount within 60 days. This can be a dangerous plan as one IRA owner found out in a recent Private Letter Ruling (PLR).
Times Runs Out for a Rollover
In PLR 201625022, an IRA owner (we’ll call her Mom) trying to keep a roof over her daughter’s head ended up running afoul of the 60-day rule. Here is her story. Mom became concerned when her daughter's home went into foreclosure in early 2015. Mom and her husband put their vacation home up for sale in order to raise funds to purchase their daughter's home. Prior to the sale of their vacation home, in order to avoid foreclosure, mom took a distribution from her IRA. She used the funds to purchase her daughter's home.
Mom intended to redeposit the funds into her IRA within the 60-day rollover period. However, the sale of the vacation home did not go through until after the 60-day period had expired. During the 60-day period, she did not have the money to complete the rollover. Mom said that her spouse was willing to take a distribution from his IRA within the 60-day period, but her medical condition prevented this from getting done.
After the sale of her vacation home, Mom tried to complete the rollover, but quickly realized the 60-day period had expired. She went to the IRS asking for a PLR giving her more time to roll over the funds. She told the IRS that her failure to roll over within the 60-day period was due to her medical conditions.
No IRS Relief
The IRS declined Mom’s request. The IRS said that it did not buy Mom’s assertion that her inability to complete a rollover was caused by her medical condition during the 60-day period. The IRS was not convinced because during the 60-day time period, despite her medical condition, Mom continued to work and travel. Instead, the IRS said what really happened was that Mom used the IRA funds as a short-term, interest-free loan to purchase her daughter's home and, as a result, sufficient funds were not available until the sale of her vacation home after the 60-day period had expired.
This PLR is yet another reminder that you should think twice before you use a 60-day rollover to borrow from your IRA. It is a risky move that only works if you need short-term cash and are sure that you can replace the money within the 60 days. Real estate transactions that take longer than expected will not receive much sympathy from the IRS. If things don’t go as planned and you don’t get the rollover done in 60 days, you will owe income tax on the full distribution, plus potentially a 10% early withdrawal penalty if you are under age 59 ½. If you are experiencing financial troubles, the last thing you will want is the loss of your retirement savings too.
Here are more examples of what can go wrong with a 60-day IRA rollover. We usually recommend a trustee-to-trustee transfer to avoid these headaches.
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