By Sarah Brenner, JD
Director of Retirement Education
With the cost of food, energy, healthcare and other basics on the rise, many Americans are facing a cash crunch. For some, their IRA is their largest asset. Therefore, it is not surprising that they may be looking to their IRAs for a quick solution. Why not borrow from your IRA instead of securing a loan? Why not use your IRA as an immediate cash resource and just pay the IRA back later?
This may sound tempting, but you should be cautious as there are rules that make this strategy more complicated than it may seem. Loans from your IRA are not permitted. In fact, taking a loan from an IRA would be considered a prohibited transaction and could result in the entire account becoming an immediate taxable distribution and the retirement savings lost.
You can, however, “borrow” from your IRA funds on a short-term basis by taking a distribution, using the funds as needed, and then replacing them in the IRA via a 60-day rollover. There is nothing in the rules that prohibits you from taking a distribution at any time from your IRA and for whatever purpose you choose. There is also no rule that limits what you can do with the money while it is out of the IRA during the 60-day period. So yes, it is possible to “borrow” money from your IRA by using the 60-day rollover rule, but this is not technically a “short-term loan.”
The 60-Day Rollover Deadline
A major concern with using an IRA for a “short-term loan” is the rollover deadline. An IRA owner does not have unlimited time to complete a rollover. Instead, there is a 60-day window to finalize the transaction. If the funds are not deposited back to an IRA within 60 days, the distribution may be both taxable and subject to penalty.
Life doesn’t always go as planned, and many times IRA owners find themselves unable to meet the 60-day deadline. While anything goes during the 60-day rollover period, it’s a different story when the clock runs out. What you do with the funds during the 60-day rollover period can never undo a timely rollover, but if the deadline is missed, the result is very different. When trying to defend a late rollover to the IRS, what happened during the 60-day period suddenly matters. Also, self-certification of a late rollover will provide no lifeline if your situation does not fit neatly into one of the 12 reasons where self-certification is permitted.
Once-Per-Year Rollover Rule Violations
Another concern when it comes to “borrowing” from your IRA is the once-per-year rollover rule applicable to IRA-to-IRA and Roth IRA-to-Roth IRA rollovers. For purposes of this rule, traditional and Roth IRA rollovers are aggregated. For example, a 60-day rollover of a Roth IRA distribution to another Roth IRA will prevent a 60-day rollover of a traditional IRA distribution, received within 12 months of the date of the Roth IRA distribution, to another traditional IRA. (Note that Roth conversions do not count against the one-rollover-per-year rule.)
This rule prevents IRA owners from rolling over a distribution within 12 months of a prior distribution that was rolled over. Naturally, that is not as simple as it sounds. The 12-month period is a full 365 days. Assume an IRA owner received a distribution on December 15 that she rolled over. She is not eligible to do another 60-day rollover from any IRA to another IRA (or from any Roth IRA to another Roth IRA) until the following December 15. The 12 months begin with the date the funds are received by the account owner.
Proceed with Caution
“Borrowing” from your IRA by doing a 60-day rollover is allowed but best avoided if possible. The risks are high and the ramifications if things do not go as planned could be a tax bill and penalties. What was intended as a short-term loan could easily result in the long-term loss of your hard-earned retirement savings.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/can-i-borrow-from-my-ira/