IRA Rollover Waiver Denied When Funds Used as a Loan

A recent Private Letter Ruling (PLR) from the IRS may be of interest to IRA owners who are thinking about using IRA funds as a short-term loan. There are a couple of factors in this ruling that you need to understand if you’re looking to use IRA funds for a short-term loan (hint: it’s not recommended!).

PLR 202033008 was issued August 14, 2020. The taxpayer had, upon the advice of his real estate agent, taken a withdrawal from his IRA in order to purchase a home. At the time, his old home had not yet sold, so he needed a cash source to make the down-payment on his new home. To make a long story short, the taxpayer’s old home sale completed after the 60-day rollover window. When he tried to re-deposit the withdrawal (actually only a portion of the original amount) into the IRA, his IRA custodian informed him that this rollover was not allowed since it was past the 60-day window.

The request for ruling suggested that the taxpayer was unaware of the 60-day window, and neither his real estate agent nor his IRA custodian informed him of this restriction. Therefore, the taxpayer asserted that the lack of notice (about the 60-day limit) from either the agent or custodian constitutes an error on the part of a financial institution, and he should be allowed a rollover waiver.

In the PLR, the IRS notes that, unlike retirement plans, there is not a requirement of an IRA custodian to provide this information, and thus does not rise to the level of an error.

Additionally, IRS asserts that the purpose of such a rollover (within 60 days) is intended to facilitate portability between qualified plans, including IRAs. This provision was not intended in any way to facilitate a short-term loan, and so this usage was inconsistent with the intent of the legislation. 

Since the reason for missing the 60-day window was not a financial institution error, and further that the withdrawal was not used for the intended purpose (solely to rollover into another account), the IRS denied the request for waiver of the 60-day limitation for this taxpayer.

The moral of the story is this: if you’re planning to use IRA funds as a short-term loan, don’t miss the 60-day rollover window! This taxpayer’s actions would have worked out okay if he had only completed his rollover within that time period.

Better yet – don’t try to use IRA funds as a short-term loan. If your only option to complete a transaction is to use funds from the IRA, you should either just withdraw the funds and consider the action complete (and plan to pay the taxes and penalties). Then, if it happens to turn out that you’re able to complete a rollover within the 60-day window, good for you! If not, at least you planned for this. 

The other option is to give the transaction a “pass” until your situation will support it without having to lean on the troublesome short-term loan.

Also: Don’t let a real estate agent advise you on your IRA. That’s not his (or her) job.

The post IRA Rollover Waiver Denied When Funds Used as a Loan appeared first on Getting Your Financial Ducks In A Row.

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[email protected] (Jim Blankenship)

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