Using rollover to repay loan

[Belgarath]

Seems like a simple question/answer but I'm not finding the citation I want to back it.

For purposes of this question, let's ignore proper loan limitations. So, you have a 50,000 account balance, and you take a 50,000 loan. Now you want to rollover 50,000 from your IRA to the plan to repay the loan. All money is pre-tax.

Problem with this is you just got 50,000 without ever paying tax on it, nor will you, since the loan is now repaid.

Must be post-Super Bowl/Monday fog, but I'm not finding the correct citation. Any bright ideas?

[Tom Poje]

I'm not sure quite how you are accomplishing this. you have a 50,000 loan balance. you can't simply take your 50,000 IRA and rollover into  the plan AND pay off the loan at the same time. your rollover goes into the rollover account. now, if you want to pay off the loan, you take a 50,000 distribution from the loan to pay off the loan.

if you are trying an end around and simply paying off the loan at the same time, then how is it a rollover?

[Belgarath]

Hey Tom - I'm not trying to accomplish this. Someone else is trying to accomplish this, and I'm saying it can't be done. I just wasn't finding a "prove it to me" citation.

[ESOP Guy]

I think the easiest way to explain why it can't be done is this:

Before the loan this person had $50k in pre-tax IRA and $50k in pre-tax 401(k) money.  A total $100k he will need to pay taxes at distribution. 

They take a loan and have no taxable income.

The use the $50k in IRA money to repay the loan. 

So now they have $0 in pre-tax IRA and only $50k in pre-tax 401(k) yet they received $50k in cash without paying any taxes.  Clever but I don't think it works for the reason Tom says.  A rollover is a rollover.  They would have to take an IRA distribution and then pay the loan.  A rollover can't be both a loan payment and a rollover by definition. I think that is why you can't find a cite.  it is embedded in the very definition of the words. 

[Belgarath]

Gracias. It's just always easier when there is a cite, so I was hoping there was something I had missed. But I've had my coffee now, so I can't blame anything further today on the fog...

[Tom Poje]

this actually sounds a bit like

Three men checked into a hotel room and were charged $30 for which they paid $10 each. The next day, the manager realized that the men had been overcharged since the real price is $25 for the room. The manager gave the bellhop $5 to return to the three men. On the way to their room the bellhop decided to keep $2 for himself so he wouldn't have to make change. The bellhop gave $1 to each man. The three men had now paid $9 each, or a total of $27. This, plus the $2 the bellhop kept for himself, makes a total of $29. What happened to the other dollar?

 

 

SOLUTION

Nothing happened to the dollar. All the money is still there. Yes, they each ended up paying $9 each for a total of $27. Plus the $3 they got back is a total of $30-it's all there. They were supposed to pay $25 but they paid $27, which makes sense because the bellhop kept $2.

Charges: $25 for the room + $2 for the bellhop=$27 $30 initial charge - $3 refund = $27 Each paid $9 and $9 x 3 = $27

The trick is in the statement, "The three men had now paid $9 each, or a total of $27. This plus the $2 the bellhop kept for himself makes a total of $29."

The $27 is the total payment and $2 is a cost, not a payment! It just happens to add up to $29 giving the illusion of a missing dollar.

thus the illusion, you are paying the loan off and having a 50,000 rollover at the same time. tricky.

[NJ Mike]

My father used to tell me this story all the time.  Love it.  The only difference is that he said the bellhop kept the $2 because he felt he was underpaid!  Thanks for posting it!  Mike

[Belgarath]

Nice. However, I want to find out where you can get a hotel room for 3 people for $30.00, just so I can avoid that neighborhood!

[Tom Poje]

actually, it was Marvin Gardens, but the hotel clerk was keeping $1 for himself. Can't trust him, the bell boys  or anyone I guess.

 

 

[MoJo]

43 minutes ago, Belgarath said:

Nice. However, I want to find out where you can get a hotel room for 3 people for $30.00, just so I can avoid that neighborhood!

Forget the neighborhood.  I want to avoid the other two who want to share a hotel room with me!

[Tom Poje]

yes, but birds of a feather flock together

 

so I guess MoJo and HoJo but I have an 'e' on the end of my name so it is not PoJo in your group

[Lou S.]

5 hours ago, Belgarath said:

Gracias. It's just always easier when there is a cite, so I was hoping there was something I had missed. But I've had my coffee now, so I can't blame anything further today on the fog...

A rollover is a contribution. A contribution is not a loan payment. What more do you need?

[Belgarath]

Nothing. The fog burned off. Thanks.

[austin3515]

My secret trick is:  If you have a $100,000 cash and a $5,000 loan, roll your $100K to your new employers plan, then take a $5,000 loan and make a rollover to an IRA (the advantage here is the 5498 from the custodian to prove to the IRS you did it).  This way you pay no taxes and you still have your $5,000 loan.

obviousluy you have to be able to rollover right away and the plan must allow for loans and you must have enough money to do all of this.  But a lot of times it lines up.

[Luke Bailey]

I think the technical issue is that when you instruct the plan administrator to use the $50k that you rolled over to pay off your loan, you have exercised dominion and control over the amount such as to make it a distribution from the plan, not the IRA. (Supporting this is the fact that your rollover account, which would exist for at least a nanosecond, disappears.)