Series of 60 day IRA loans?

[UM1234]

Hello,

I recently withdrew 30K from one of my IRAs for a short-term cash need. I plan to redeposit the money in the same IRA within 60 days.

I would like to keep doing a series of 60-day loans until later this year when I will have revenue from my business to pay the IRAs back completely. My wife and I have several IRAs between us.

I know there was a recent Tax Court decision that the one-rollover-per-year rule applies per person, not per IRA. Per the following link, the IRS will not start enforcing this until 1/1/2015 at the earliest. http://www.irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule So, the Tax Court decision doesn't preclude me from doing a series of 60-day loans as long as I finish in 2014.

But, I am still wondering if there will be any problem with the following set of proposed transactions. I think the answer is No (i.e., it is fine to do this). As I understand the current rules, a single IRA can't initiate more than one rollover (distribute $), nor accept funds from more than one rollover (receive $), in the same calendar year. In the below transaction, each individual IRA distributes $ once and receives $ once.

30K out of IRA A, spend it

By day 60, roll 30K from IRA B into IRA A

By day 120, roll 30K from IRA C into IRA B

By day 180, deposit 30K into IRA C from outside earnings

Series of 60 day loans complete.

Any thoughts/comments are welcome and greatly appreciated. Thank you!

[masteff]

I'm sure the taxpayer, who was the subject of the tax court case referred to in that link, would disagree with your assessment that "it is fine to do this". If it was truly fine, then that taxpayer would not have had a court ruling against him. Mr Bobrow would point out to you that the IRS has in fact already enforced that rule against at least one person, him.

You will have to decide for yourself how much faith you're willing to put in the IRS' statement that it will delay implementation of the new rule. I'd say the odds are in your favor, but that's strictly a personal opinion.

[UM1234]

Thank you, great response. I agree it comes down to how much faith to put in the IRS (chuckling as I write that).

I may do two 60-day loans: one from an IRA of mine, and one from an IRA of my wife's. This would comply with the one-rollover-per-person requirement of Bobrow, even though the IRS says they won't enforce until at least 1/1/15. I see no risk with this approach (disagreement welcome).

I may also open an individual 401(k) with a loan provision, roll my old 401(k) and IRAs into that, and then take a loan from the individual 401(k). Provided I comply with the requirements to have a 401(k) loan be a nontaxable transaction, this should work.

[K2retire]

I may also open an individual 401(k) with a loan provision, roll my old 401(k) and IRAs into that, and then take a loan from the individual 401(k). Provided I comply with the requirements to have a 401(k) loan be a nontaxable transaction, this should work.

This sounds like the safer route. Plus you would have 60 month to repay the loan rather than 60 days.

[John G]

I am not sure I buy into "this is fine".

My first problem is with the terminology. If you are taking cash out of an IRA, it is a distribution. I think calling this a rollover is confusing. A distribution can be redeposited in 60 days which cancells out the distribution.

The "I" in IRA stands for individual and you are correct that your options and your wifes options are separate.

Other problems include failure to get the mechanical money movement done on schedule. A custodian might muck up the documentation. I just would not recommend going this route because of Murphy factors. It sounds like your cash funds are tight and the lack of liquidity can cause a tremendous number of problems. Sickness, acidents, spousal disputes...I can think of a lot of things that can go wrong.

You may want to consider a home equity loan or signature loan as an alternative. Money is on sale in 2014. Interest rates are very low.

[ForksnKnives]

I thoroughly disagree that "this is fine". As masteff pointed out, the IRS already has enforced this rule at least once even if widespread enforcement isn't allegedly scheduled to begin until next year. The IRS's choice to allocate resources to enforcement doesn't mean the IRS cannot raise the issue with you in a future audit. It will not be a defense that the IRS said enforcement will begin next year.

Generally it sounds like you are trying to outfox the IRS. That's a pretty bad idea. There are other options to obtain loans and as John points out, interest rates are very low. You might be able to obtain a loan secured by the IRA in which you are retaining your tax deferred investment returns and paying a very low rate on a loan.

[UM1234]

All good points and very well taken. Thank you very much. I am going to take a 401(k) loan, part of which will go to redeposit $30K in my IRA within 60 days of withdrawing $30K. I will not do a series of rollovers as originally proposed. My HELOC doesn't have a lot of room left but I'm making use of that. I'll look into a signature loan as well.

[John G]

All of the above....plus.... The whole purpose of having a Roth or IRA is to accumulate wealth in a tax shelter. Everytime you take money out, you are giving up that opportunity, even if it is only for 60 days. It can also make a hash over your investment choices. In/out suggests that you have a lot of cash in the account, or you are liquidating positions, then buying again. That means extra transaction fees.

If you are running a business, perhaps your suppliers may help with your finance issues. For example, you might buy inventory with an agreement to pay in 60 days. A generally reliable business might be able to get a supplier to agree if the issue is brought up before the purchase.

I once had a friend who borrow from the IRS! He knew he was going to owe over 250K in taxes. He had a great deal coming down the pike and decided to do the deal rather than send in two quarterly estimated payments. The deal netted him over a 50% gain. The taxes and penalty were a lot less. I know that the accountants who post here would not recommend this gunslinger approach and cavalier treatment of taxes, but it sure worked for this guy in this rare circumstance.