Borrowing from IRA (prohibited?)

[JAinNC]

Client (age 63) just called: He says his investmaent firm says he can take out 75,000 from his traditional IRA and "pay it back" within 60 days with no taxable event.

I've been on 14 wonderful days of vacation and I know my brain is slack --- But .... Isn't this a prohibited tranaction?

He also asked if he could also do the same thing with his other IRA in a different investment firm soon after that. So I am thinking he may be confused and may want to take out a distribution from one IRA and roll it to the other within 60 days.
I know he can't do but one IRA rollover (from time of distribution for 12 months).

I need more info from him - but I just wanted you experts to boost my slack brain.

Thanks
Jeannie

[Lion]

Repay

He can put money back into his IRA within 60 days. However, does he know for sure when he has to get the funds to his plan trustee in order for the plan to record the funds as received into the plan by the deadline? Do they have to be sent across the country? Does he really have something so pressing and so short-term that he'd risk pulling money out of his IRA?

[JAinNC]

Yes he says it is a temporary withdrawal

Thanks.Lion
He is in the same city as his investment and has stated that his day for withdrawal is in last few days of July.
He wants to make a temporary withdrawal (from his other IRA account) 30 days fafter the first temp. draw of another 75,000 so he has a 90 day cash flow of the money. His question to me was " Can he do the second one without taxable result?"

Bless you for answering me. Continued advice appreciated.

[Lion]

Research

You'll still have to research whether or not he can do more than one temporary withdrawal in a year.

If he can, why not withdraw the second funds shortly before the first are due, repaying the first with the second, thereby giving himself nearly 120 days use of $75,000?

The big question for your client is if he can scrape together $75,000 in time to repay his second IRA (or his first if two repayments are not allowed). Hope he's not investing in something very illiquid or very volatile. He's loaning it to a relative who promises to return it in time, right? (But, relative won't withdraw her own retirement funds!)

CYA

[Gene V]

This should explain the rollover

From Pub. 590 page 25

Waiting period between rollovers.
Generally, if you
make a tax-free rollover of any part of a distribution from a
traditional IRA, you cannot, within a 1-year period, make a
tax-free rollover of any later distribution from that same
IRA. You also cannot make a tax-free rollover of any
amount distributed, within the same 1-year period, from the
IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the
IRA distribution, not on the date you roll it over into an IRA.

Example. You have two traditional IRAs, IRA-1 and
IRA-2. You make a tax-free rollover of a distribution from
IRA-1 into a new traditional IRA (IRA-3). You cannot, within
1 year of the distribution from IRA-1, make a tax-free
rollover of any distribution from either IRA-1 or IRA-3 into
another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not
prevent you from making a tax-free rollover from IRA-2 into
any other traditional IRA. This is because you have not,
within the last year, rolled over, tax-free, any distribution
from IRA-2 or made a tax-free rollover into IRA-2.

[erchess]

T T B 1040 Ed 1-16

I may be the only regular on this board who needed confirmation, but you can't borrow from an IRA the way you can from qualified plans. Therefore I assume that the taxpayer will tell the trustee that he is taking a premature distribution or that he is planning an indirect rollover. Unless I'm very much mistaken, either way the Trustee will have to take out 20% of the distribution and send it to Uncle Sam. Assuming the taxpayer does put the money he got back, will the withholding also be returned to his account or will he have a premature distribution equal to that amount?

I think it would be important for the tax professional to document all the potential pitfalls of which he or she warns the client. I might even write a letter and send it certified mail return receipt requested.

[MLINDER42]

Borrowing Fro Ira

The taxpayer would have to be able to replace the 20% withheld when he pays back the withdrawal. Example takes $50,000 receives $40,000 must replace $50,000.Does not get other money back till files return.I have never seen a client that understands the whole process.

[JohnH]

Off the top of my head here - I believe a taxpayer who is over the age of 59-1/2 can direct that no taxes be withheld.

[JAinNC]

Thanks John and all

Off the top of my head here - I believe a taxpayer who is over the age of 59-1/2 can direct that no taxes be withheld.

I agree but - as I said in my post---- He may be confusing a rollover with something else.

If this is a tempory withdraw (cannot find any tax info on that) - is if treated as if it were a rollover for the 12 month rule?

BTW he is not a risk taker - he is retired and owns rental properties. What he needs the money for is not what I need to address.

Jeannie

[JAinNC]

From Pub. 590 page 25

Waiting period between rollovers.
Generally, if you
make a tax-free rollover of any part of a distribution from a
traditional IRA, you cannot, within a 1-year period, make a
tax-free rollover of any later distribution from that same
IRA. You also cannot make a tax-free rollover of any
amount distributed, within the same 1-year period, from the
IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the
IRA distribution, not on the date you roll it over into an IRA.

Example. You have two traditional IRAs, IRA-1 and
IRA-2. You make a tax-free rollover of a distribution from
IRA-1 into a new traditional IRA (IRA-3). You cannot, within
1 year of the distribution from IRA-1, make a tax-free
rollover of any distribution from either IRA-1 or IRA-3 into
another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not
prevent you from making a tax-free rollover from IRA-2 into
any other traditional IRA. This is because you have not,
within the last year, rolled over, tax-free, any distribution
from IRA-2 or made a tax-free rollover into IRA-2.

But I am not sure this is a rollover. I may need to talk with his investment person.

[Bees Knees]

I may be the only regular on this board who needed confirmation, but you can't borrow from an IRA the way you can from qualified plans.

Taking money out of an IRA and putting it back within 60-days is not considered borrowing. It is considered a rollover.

Unless I'm very much mistaken, either way the Trustee will have to take out 20% of the distribution and send it to Uncle Sam.

The 20% withholding rule only applies to distributions from qualified plans. It does not apply to distributions from IRAs.

[sea-tax]

If your client is trying to move money from one ira at one custodian to the ira at another custodian then the client should try to get a direct trustee to trustee transfer. If this is unavailable then a 60day rollover would work.

If the client is trying to take money out of his IRA for a short term loan, while it is theoretically plausible , I would strongly tell the client to not do it. I have personally seen clients with all the intentions of replacing the money in the 60day time frame fail and the rules do not suffer mistakes well. In fact I have seen clients try this twice in the housing boom of 2004-2006 try this to acquire property, and they both failed miserably. Against my advice I might add. But hey they wanted to listen to their real-estate agents instead of me funny thing was that the real estate agents were no where to be found when the 10% penalty and taxes had to be paid, they got the commission and have never been seen since.

[joanmcq]

it IS a rollover. you can do it once; but if it fails, don't go looking for a waiver to be able to reinvest the funds in the IRA. At least he won't have penalties, but the full amount is a distribution. And a second one is NOT allowed. I can't stress this too much. Get your advice in writing.

I had clients listen to their real estate agents and are now looking to sell a property at a loss after bleeding cash for a rental that can't pay for itself and taking a 40K tax bite in the process....

[Roberts]

He can make a rollover and have control of the money for 60 days. Many people do this to qualify for loans they might not have otherwise qualified. Then after they get the loan they take the money out of the bank and roll it into their new IRA. It does work and your IRA custodian doesn't have to withhold the 20% if you request it (they'll often times withhold the money if you don't make it very clear that they shouldn't).

Your client needs to be extremely careful about getting the money back in the account before the 60 days is up. Don't try and cut it short because people in the back office of investment firms aren't nearly as concerned about avoiding that 20% fee as your client expects them to be.

[Burke]

I agree but - as I said in my post---- He may be confusing a rollover with something else.
If this is a tempory withdraw (cannot find any tax info on that) - is if treated as if it were a rollover for the 12 month rule? Jeannie

There really is not any law or rule concerning a "temporary withdraw," per se. He can make a withdrawal -- period -- and if he puts it back in within the allowable 60-day time frame -- it is considered a non-taxable rollover. However, the custodian WILL issue a 1099R for the withdrawal if he does not redeposit the funds back into the same account or institution, so he should expect that. Sometimes they issue them regardless. Then, if the TP meets the rules for putting it back, you show it as a rollover on the tax return, and there is no tax liability.