Dear Tax Talk, I need a loan for five months. Can I tap my IRA for $10,000 and then borrow another $10,000 from the IRA before the 60 days are up on the first $10,000 and roll that back into a retirement account and repeat one more time, at which point I should have the funds to repay the $10,000? Will this enable me to avoid the 10 percent penalty for early withdrawal? Or does the IRA have to be restored to the original amount within 60 days of the first withdrawal to avoid the penalty? -- Justin
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Dear Justin, Technically your plan is to use the tax-free 60-day rollover time period allowed with individual retirement accounts, or IRAs, but then within 59 days take out another $10,000 and then "repay" the $10,000 you took originally, thereby extending the repayment due date. And you want to do this more than once to stretch out the repayment period of the IRA loan for five months.
Unfortunately, you are only able to make one tax-free rollover within a one-year period. If you exceed the 60-day limit, you are not only taxed on the income, but the additional 10 percent tax may also be incurred if you are not yet 59 1/2 years old and do not meet any of the exceptions for an early IRA distribution.
At this point, you should consider all other options you may have available to you, such as family members, a home equity line of credit or other financial resources.
This is a good case for why you need to try and build up a savings plan so that you have more flexibility in your life when these financial bumps occur. Think of your IRA as a last resort when you are in need of extra funds, as these funds are really for your retirement years. Hopefully you are now deferring income at higher tax rates to your retirement years, when your tax rates may be lower. The funds you invest in your IRA also grow tax-free, which is an added incentive to keep your money in the account. Last but not least, the additional 10 percent tax on top of the regular tax on the distribution makes it much worse to take money out early.
Thanks for the great question and all the best to you in figuring this out.
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