Have you heard of the 60 Day Rollover Rule?
Most people who own a traditional IRA know that they will get hit with a 10% early withdrawal penalty if they withdrawal funds before they turn the magical age of 59.5. With ordinary income tax plus the 10% penalty – it’s very unattractive to pull money out early except in cases of extreme need.
However, there’s a little-known rule that allows for some flexibility if you need a short term loan from your Traditional IRA. This rule applies to Traditional IRAs, Roth IRAs, SEPs and SIMPLEs, and an important exclusion is Beneficiary IRAs. You can temporarily take ownership of your IRA funds prematurely – without tax or penalty – as long as the balance is deposited back into the IRA within 60 calendar days.
Example:
Susan is 51 years old and is selling her car next month to her sister for $20,000. In the meantime, she wants to purchase her brand new car tomorrow. She plans to use the funds from the sale of her current car to fund her new one, but needs the cash today. Susan calls her financial advisor and decides to proceed with a 60 day rollover from her SEP IRA. She uses the $20,000 to purchase her new car outright, and then replaces the funds in her IRA in 40 days after her sister pays her for her old car. The IRS charges her no taxes or penalties for doing so.
While this can be a great option for clients in a pinch – this isn’t a strategy we recommend depending on. The rules state you are only allowed to do this once per rolling 365 day year, so it’s important to keep track of when you executed a rollover. Additionally, if you miss the 60 day window by even one day, the whole distribution becomes subject to taxes and penalties. That can really add up, so it is important to be sure you can replace the money in a timely fashion. Finally, you miss out on market conditions while you are using your money, if there is good market rally in the time you are using your funds, you miss the boat.
In general, the 60 day rollover rule allows for flexibility in IRAs that are known for having rigid rules. Talk to us about your short-term money needs, and we can determine if a 60 day rollover makes sense for you.