By Sarah Brenner, JD
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For many Americans, their IRA is their largest asset. It is not surprising then that in times of financial trouble they may want to turn to their IRA as quick source of cash. If this is your situation and you are thinking about using your IRA for a short-term loan, here is what you need to know.
Some employer plans include provisions where participants can take loans, but IRAs are different. There are no loan provisions for IRAs. In fact, taking a loan from your IRA would be considered a prohibited transaction and could result in the IRS considering your entire IRA liquidated and your retirement savings lost.
Because IRAs do not have loan provisions like qualified plans do, the only way to access your IRA funds on a short-term basis would be to take a distribution, use the funds as needed, and then replace them in the IRA by doing a 60-day rollover. There is nothing in the rules that prohibits you from taking a distribution whenever you want from your IRA and for whatever purpose you choose. There is also no rule that limits what you can do with your money while it is out of your IRA during the 60-day period before the rollover. So yes, technically you could take money from your IRA as a short-term loan using the 60-day rollover rule.
While you may be able to do this, the bigger question is whether it is a good idea. Doing a 60-day rollover can be tricky. There are many rules that must be followed, such as the one-rollover-per year rule. This rule limits you, with some exceptions, to one IRA rollover in 365-day period. That’s it! If you run afoul of this rule or any other rollover rule, your distribution will be considered taxable and will be subject to penalty if you are under age 59½. This is a mistake that can’t be fixed.
Another concern is the rule’s deadline. You must deposit the funds within 60 days from the day you receive the IRA distribution. What if you do not have the money to complete the rollover by the deadline? Again, you would be facing a taxable IRA distribution and potential early distribution penalties. Don’t expect any sympathy from the IRS. In many Private Letter Rulings, the IRS has refused to grant relief to taxpayers who used 60-day rollovers to take short term loans from their IRAs but failed to complete a rollover by the deadline. A failed short-term loan is also nowhere to be found on the list of reasons why the IRS will allow a late rollover through the self-certifications procedures.
The bottom line is that using your IRA for a short-term loan by doing a 60-day rollover is allowed, but best avoided if possible. The risks are high and the cost of things not going as planned could be a tax bill and the loss of retirement savings with no relief likely from the IRS.