Financial Affairs

No interest loan? You can leverage your IRA

John grobe

Interest rates are as low as I’ve ever seen them – and I’m old. I’m not quite as old as the two main presidential candidates were, but this statement is “overwhelming with slight praise” as my mother used to say. I turned 74 the day after election day, and in my lifetime only one American president was younger than me. Regardless of my age, when I log into my computer I keep seeing graphics that assure me I can get a 15-Year mortgage for 2.25% (which I would probably pay off when I hit 89 years). A quick Google® search tells me that I can get a personal loan (secured or unsecured) for as little as 5.99%. What a great time to be a borrower!

But I can get a 60 day interest free loan from myself with Uncle Sam’s blessing! What’s the catch? The loan must be 60 days or less; longer and I pay through the nose. How can I access this offer?

First, I must have an Individual Retirement Agreement (IRA) that contains enough money to meet my short-term loan needs.

Second, I need to withdraw 120% of what I need from this IRA. The reason I have to take 120% of what I need is because Uncle Sam will withhold 20% of what I take out for federal income taxes. This holdback is insurance against default on my “loan”. So if I needed $ 100,000, I would have to withdraw $ 120,000 from my IRA.

Third, I must repay the full amount that I “borrowed” ($ 120,000 in the example in the previous paragraph) to my IRA within a maximum of 60 days.

If I complete all of the above steps, I just used my money for 60 days at no cost. What could go wrong? I’m sure you and I can think of a lot of things that could go wrong. There are a lot of things that can prevent us from returning our full withdrawal amount to our IRA within the 60 day period. In the following paragraphs, I will explain this loan in more detail, which in IRS parlance is called a “60-day rollover.”

A long time ago, when I was 30 years old and the IRA was a new creation of the tax code, anyone was allowed to transfer money from a tax deferred account to a other without paying tax or penalty was completed within 60 days. Several renewals were authorized each year.

At 50, the rules had changed. So-called “60-day renewals” were still allowed, but 20% was withheld for federal income tax in case you didn’t roll the money within the designated 60-day timeframe. Direct transfers (from one tax-deferred plan to another) were not subject to any withholding.

More recently, the rules have been tightened even more. Only one 60-day transfer from IRA to IRA per person was allowed once every 12 months. But you can still do one of these rollovers every 365 days. And that’s where the interest-free loan comes from. If you take money from an IRA and transfer it to another tax-deferred account (or even return it to the account you withdraw it from) within 60 days, no taxes or penalties are incurred. of.

IF you need a short-term loan AND know you can pay it off within 60 days, THEN consider taking out an interest-free loan from your IRA on a 60-day rollover. BUT be aware of the issues if you can’t pay it back within 60 days.

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