Publication : The Kiplinger Tax Letter
Issue : Volume 79, Issue 14
Date : 07/08/2004

Watch out if you "borrow" from your IRA for short-term cash needs. Although your IRA cannot lend you money, you can borrow from it by withdrawing funds and quickly restoring the identical amount of cash. In effect, you are making a tax-free rollover of the amount distributed.

The money must be returned within 60 days or the payout is taxed and also is subject to a 10% penalty if you have not yet reached age 59 1/2.

The IRS frowns on waiving the 60-day period. In a private ruling, it denied a request for relief from an unemployed filer who tapped his IRA to avoid foreclosure on his home. After he was turned down for mortgages by a number of lenders, his mother stepped in and loaned him enough money to restore his IRA. But 102 days had passed. The withdrawal was taxable.

The 60-day time limit is extended to 120 days for home buyers. If you use the initial withdrawal from the IRA to help buy a first home, you have 120 days to return the amount of the distribution and avoid tax. The extra time applies even if the deal falls through, the IRS privately says.

There's one other trap to note if you use this borrowing trick: You can do so only once every 12 months from that particular IRA. There is no 12-month limit on transfers from one IRA trustee to another.