Update Jan 2015
This strategy of the "IRA loan" described in this post is no longer permitted. IRS has closed the loophole. Current rule:
Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.
The one-per-year limit does not apply to:
- rollovers from traditional IRAs to Roth IRAs (conversions)
- trustee-to-trustee transfers to another IRA
- IRA-to-plan rollovers
- plan-to-IRA rollovers
- plan-to-plan rollovers
Unlike 401(k) accounts which are permitted to offer participant loans, the IRS does not permit IRA loans. However, with a little creativity, this article shows you how to use your retirement account as a source of loan funds. Note that the following tactic is not a recommendation but simply a solution for people who get caught short of funds during this difficult economy.
The IRS has a 60-day rule for Individual Retirement Arrangements whereby you can distribute money from your IRA and replace it within 60 days for a nontaxable event. In effect, an allowance for a 60-day IRA loan (although not the intention of the rule). Let's see how we can use this 60-day IRA distribution rule to provide yourself a year-round IRA loan.
Let's hypothetically say you have $180,000 in your Individual Retirement Arrangement. You can take this single IRA and divide it into six equal accounts of $30,000 each. Let's call these accounts #1 through #6. You can withdraw $30,000 from account #1. In 60 days, withdraw $30,000 from account #2 and 'pay back' the money to account #1. Sixty days later you withdraw $30,000 from account #3 and payback account #2, and so on. At no time, do you hold money out of any single account more than 60 days. In this manner, you are able to stretch the rule for 60 days over 360 days i.e. six IRAs x 60 days each to give yourself an IRA loan throughout the year.
Note that if you get through the 360 days and still need the $30,000, you have a problem because you cannot go back to IRA#1 for another 6 days since the rule is that you can only use this withdrawal feature once per year from any account. Since you used this IRA withdrawal feature 360 days ago with account #1, you must wait another 6 days for a full year to elapse. The alternative is to divide the IRA into 7 portions ($180,000/7 = $25,714). You can then keep the $25,714 as a loan indefinitely because 7 x 60 = 420 days, meaning you never need to employ the 60-day rule more than once per year with any single account.
Just be careful not to hold onto any IRA funds for more than 60 days or make an IRA withdrawal from any single IRA more than once per calendar year. Either violation will trigger the tax on that IRA. In addition, if under age 59 1/2 and no other exemption applies, you also will have a 10% penalty.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions