borrowing from ira

[lazygood4nothinbum]

i'm pretty sure this isn't how you all play with money but maybe someone here has an answer.

i've got two ira's and a temporary cash flow problem.

the problem is my car lease is up in april. i can only extend it for 2 months. i'd like to buy new car with proceeds from inherited house but it could take a year to sell in this market. i'd rather not pay income tax on money i otherwise could withdraw from ira to buy car.

i think i understand that i can borrow from an ira tax & penalty-free if i return the money within 2 months. question: can i borrow from my ira for two months and then pay it back with a loan from my inherited ira and then pay that back within two months from other funds, thus giving myself another 6 months before i'd have to pay either income tax or interest on money for the car so that if the house sells by then i might possibly avoid those extra costs entirely?

yes, i know, i'm temporarily living above my means but only because my means aren't quite liquid right now. anyway, will this boat float?

 

[Nords]

i think i understand that i can borrow from an ira tax & penalty-free if i return the money within 2 months. question: can i borrow from my ira for two months and then pay it back with a loan from my inherited ira and then pay that back within two months from other funds, thus giving myself another 6 months before i'd have to pay either income tax or interest on money for the car so that if the house sells by then i might possibly avoid those extra costs entirely?

As thrilling as these financial gymnastics may be-- could the same result be accomplished with a home equity line of credit or a credit card, and paid off when things settle down?

 

[lazygood4nothinbum]

i love your responses to my silly questions. and yes, home equity line is option i have at the ready. i just can't stand paying interest when i have the money. i guess that makes me an emotional investor huh.

 

[spideyrdpd]

Why would you lease a car

if you have a roth ira you can take out the money you put in tax and penalty free. You cant specifically put that money back but if you have income you can put some money in for last year as long as you havent done your taxes. Or you can fund next years roth

 

[lazygood4nothinbum]

currently leasing t-bird because ford subsidizes about $150 or more per month for me to drive it rough on the road.

and thanx but i know that you can borrow money from an ira for 2 months. i just don't know if i can double dip. i know i can't treat the inherited ira as if it were mine as far as rolling over to a roth but i don't know if i can treat it as mine as far as borrowing from it is concerned. nords might have the right thinking on this anyway. and just when i was having fun complicating the issue.

 

[retire@40]

...i think i understand that i can borrow from an ira tax & penalty-free if i return the money within 2 months. question: can i borrow from my ira for two months and then pay it back with a loan from my inherited ira and then pay that back within two months from other funds, thus giving myself another 6 months before i'd have to pay either income tax or interest on money for the car so that if the house sells by then i might possibly avoid those extra costs entirely?

yes, i know, i'm temporarily living above my means but only because my means aren't quite liquid right now. anyway, will this boat float?

Danger: Don't try this at home.

 

[spideyrdpd]

So you dont have money in a roth ? I wasnt discussing the rollover since that would NOT work.

With the rollover you can only do it once in 12 months. Plus you cant do the rollover in an inherited ira.

I suppose you could do the rule of 72t and figure out some other complicated way of doing it.......

Inherited IRA - An IRA acquired by the non-spousal beneficiary of a deceased IRA owner. Special rues apply to an inherited IRA. New contributions are not allowed to this IRA, and rollovers to another IRA are not permitted (although direct transfers to another IRA are allowed). Inherited IRA amounts must be distributed within a period specified by the tax laws.

 

[LOL!]

Let me throw a wrench into your plan. You are going to withdraw your IRA into your own hands in order to contribute it to another IRA within the 60 day window that you have to do this. I think the custodian of your IRA is required to withold 20% tax on your withdrawal. Then within 60 days, you have got to put back the money plus the 20% tax withholding. That is, you've got to find that 20% from somewhere else. Then next year you get tax refund for the excess taxes you paid. So that complicates your cash-flow problems.

 

[FIRE'd@51]

I think the custodian of your IRA is required to withold 20% tax on your withdrawal.

With an IRA distribution you can elect the amount you want withheld, including zero.

Although you can take a distribution from an IRA and return it within 60 days, I believe you can only do this once in a 12-month period.

 

[gindie]

I think the custodian of your IRA is required to withold 20% tax on your withdrawal.

LOL! -

Actually, the 20% thing only applies when rolling over an employer account (401K, etc.). That's why it's always recommended to do trustee-to-trustee transfers for those.

 

[LOL!]

Well, there you go.

 

[OAG]

60 days, no penalty, no withholding (unless required by law, wrong or no SS number on account or something like that). I did do it in 2005, no hassle but be sure you get it back in the 60 days (it is not 2 months, as that may be 61 days and a no no?).

 

[lazygood4nothinbum]

Danger: Don't try this at home.

lolololol

I suppose you could do the rule of 72t and figure out some other complicated way of doing it.......
Inherited IRA - An IRA acquired by the non-spousal beneficiary of a deceased IRA owner. Special rues apply to an inherited IRA. New contributions are not allowed to this IRA, and rollovers to another IRA are not permitted (although direct transfers to another IRA are allowed). Inherited IRA amounts must be distributed within a period specified by the tax laws.

thanx but i don't think 72(t) is gonna pay for that beemer i got my foolish eye on, not unless it starts spitting out chunks of $50k. and i can't find a rule that mentions if borrowing from an inherited ira is prohibited.

Let me throw a wrench into your plan. You are going to withdraw your IRA into your own hands in order to contribute it to another IRA within the 60 day window that you have to do this. I think the custodian of your IRA is required to withold 20% tax on your withdrawal. Then within 60 days, you have got to put back the money plus the 20% tax withholding. That is, you've got to find that 20% from somewhere else. Then next year you get tax refund for the excess taxes you paid. So that complicates your cash-flow problems.

haven't i complicated this enough? what are you trying to do, confuse me?

Although you can take a distribution from an IRA and return it within 60 days, I believe you can only do this once in a 12-month period.

that would sure kill the deal

be sure you get it back in the 60 days (it is not 2 months, as that may be 61 days and a no no?).

good to know. i only found out about the time limit because i was going to pay some ira money back the other month when an insurance check came in only to find out there were time limits.

 

[Nords]

i just can't stand paying interest when i have the money. i guess that makes me an emotional investor huh.

Well, the interest is probably going to cost less than the potential penalties of missing a deadline playing IRA hot potato.

I bet the IRS's 1099-matching computers even pay close attention to shenanigans like this-- sort of the equivalent of streaking through the IRS headquarters waggling your fingers in your ears and yelling "Losers!"

I'd think penalties would inspire more emotion than interest expenses.

 

[OAG]

Interesting discussion. BTW when I withdrew the IRA Money in 2005 I did not intend to put it back when I took it out. After about a month I could put it back and did. When I put it back the interest rate was higher than when I took it out (that was nice). Also to be clear I am over 59.5 years old so withdrawals are not subject to the Federal Penalty and since it was from PENFED there was no CD penalty since they allow penalty-free withdrawals at my age. Also there was no withholding required, asked for $X and got $X. So with all of those caveats it worked for me very well. Next time I have a need to do it I may actually consider the interest rate situation.

 

[saluki9]

The answer is pretty clear, you can borrow from both.

The service doesn't care what you do with the money, just that you do it only once per year. They also do not keep very close track of these loans. Plenty of people have missed their 60 day window, but I wouldn't if I were you. Most custodian's mainframes will automatically spit out your 1099R at the end of the year if you do miss it, then it's up to you to debate it.

 

[retire@40]

The answer is pretty clear, you can borrow from both.

I know in reality, that is what is being done. But it really bothers me to see the words "borrow" and "IRA" in the same sentence.

Put it this way, in an audit, I would never tell the IRS agent "I just borrowed money from my IRA for less than 60 days."

 

[saluki9]

I know in reality, that is what is being done. But it really bothers me to see the words "borrow" and "IRA" in the same sentence.

Put it this way, in an audit, I would never tell the IRS agent "I just borrowed money from my IRA for less than 60 days."

Why? There is nothing illegal about it? You would be following the law to the letter.

Also, chances would be good that your IRS agent wouldn't even know about this provision.

 

[FinanceDude]

Also, chances would be good that your IRS agent wouldn't even know about this provision.

 

[FinanceDude]

i love your responses to my silly questions. and yes, home equity line is option i have at the ready. i just can't stand paying interest when i have the money. i guess that makes me an emotional investor huh.

Well............technically you don't have the money, right? I think the HELOC is the easiest way to handle things for a short time frame, plus you can deduct the interest paid to some extent, therby mitigating the higher interest rate...........

 

[retire@40]

Why? There is nothing illegal about it? You would be following the law to the letter.

What about IRC 408(e)(3)?

 

[Nords]

What about IRC 408(e)(3)?

Oh, hey, don't trouble yourself, I'd be happy to get that for you:

"408(e)(3) Effect of borrowing on annuity contract. -If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day."

Page 7 of http://www.irs.gov/pub/irs-tege/irc408.pdf near the bottom.

In case you're wondering, Retire@40, these pseudo-ingenuousintellectual Socratean trivia challenges without benefit of links or other references are why people think of you as a noodge.

 

[saluki9]

What about IRC 408(e)(3)?

When you "loan" money you are just doing a generic or "unspecified" rollover. There is nothing illegal about that.

 

[Martha]

I'll try to douse some fires here. Everyone is right.

You can't borrow from an IRA under section 408 of the IRC. So as retire@40 alludes to, you don't want to use the words "borrow" and "ira" in the same sentence when talking to the IRA.

But, you can withdraw money from an IRA provided you put it back into an IRA within 60 days. This is considered to be a rollover, not a loan. So you use the money for what you want to use it for in the grace period you have to rollover an IRA into another. It is not a loan as a technical matter.

 

[retire@40]

Oh, hey, don't trouble yourself, I'd be happy to get that for you:

"408(e)(3) Effect of borrowing on annuity contract. -If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day."

Page 7 of http://www.irs.gov/pub/irs-tege/irc408.pdf near the bottom.

In case you're wondering, Retire@40, these pseudo-ingenuousintellectual Socratean trivia challenges without benefit of links or other references are why people think of you as a noodge.

I didn't realize I was talking to you.

For someone that's retired early, you sure have a lot of hostility in you.