Should Your IRA Be Your Cash Machine?

There are so many wonderful things to know about IRAs that we sometimes forget a few. You probably remember, for example, that Roth IRAs let you accumulate wealth that you can ultimately withdraw tax-free. But maybe it slipped your mind that when you roll over one tax-deferred retirement account into another one, you have just 60 days to complete the process.  

Why does this matter? Well, if you don't meet the 60-day rule, you get slapped with a hefty 10% penalty, as well as immediate taxation. (With a $50,000 rollover, the penalty alone would amount to $5,000.) In The Wall Street Journal recently, Glenn Ruffenach reported a new trend with the IRS: It's enforcing the 60-day rule more than ever. You see, it seems that many folks at the IRS, contrary to popular expectations, have hearts. In the past, they'd sometimes cut you slack if you took a little longer than 60 days to complete your rollover. But no more Mr. & Mrs. Nice Folks.

Here's why: It seems lots of people were taking money out of one IRA not just because they wanted to roll over to a new account, but because they were borrowing money. They were using their IRA as a source for a short-term loan. This can work out well -- and our tax expert, Roy Lewis, has even written about this strategy before.

The trick, though, is to take the limits and rules seriously. Ruffenach offered a few sobering examples, such as:

A person pulled money from his IRA to buy a retirement home. He assumed that sales of other properties he owned would allow him to replace the IRA funds. When those sales didn't materialize, he applied for a loan -- but 60 days passed before the loan was approved. The IRS denied his request for a waiver to complete the rollover, saying the funds had been used solely as a "short-term, interest-free loan."

In another example, someone claimed that he missed the 60-day limit due to illness. But the IRS denied him, saying that he couldn't prove it and that he'd taken care of other financial matters during the period.

Other options
If the thought of screwing up and getting socked with a major penalty frightens you, as it would me, remember that you do have other options, should you need fast cash. You might, for example, take out a home equity loan or a home equity line of credit. You might borrow against some other property you have. You might tap sweet Aunt Zelda. And you might take out a margin loan from your brokerage. These options vary in how quickly they'll produce cash, but they're worth considering.

Many people don't think about margin as a possibility, but if you have a sizable portfolio with your brokerage, you can borrow against it, "on margin." Such margin loans are typically made so that you can use the proceeds to invest in additional securities, thereby using leverage to turbocharge your performance (or increase your loss, depending on your level of success). I myself have tapped margin for other purposes (such as part of a down payment on a house), and I know that I wasn't asked what the money was for -- just where to send it. So know that it's an option -- but use it carefully.

Learn more
You can learn all about IRAs and how they can help you secure a more comfy retirement in our IRA Center.

I also encourage you to take advantage of a free 30-day trial of the Fool's Rule Your Retirement newsletter service. It's prepared by Robert Brokamp, a smart and witty guy who distills what you really need to know into a manageable volume each month. A free trial will give you full access to all past issues, allowing you to gather valuable tips and read how folks have retired early and well. Robert regularly offers recommendations of promising stocks and mutual funds, too.

The following articles may also be of interest:

Longtime Fool contributor Selena Maranjian welcomes your comments. The Motley Fool is Fools writing for Fools.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 534148, ~/Articles/ArticleHandler.aspx, 10/20/2014 6:06:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement