Withdrawing and paying back within 60 days

I have a client who is over age 701/2 and has an IRA in the amount of 1.8 million. In Jan 2008 he wants to take a 150,000 out of the IRA so he can pay off a second mortgage and then get his first mortgage refinanced. After the refinance then he plans to get a new second mortgage and then pay back the 150,000 that he took out of the IRA. He plans to have all this done within 60 days.

Can he do this and in essence not have to pay taxes?

The RMD he has to take for 2008 is another issue and we are aware that he will have to take that and pay taxes by 12/31/2008.



The first distribution from an IRA is considered the RMD, so he would have to take out $150,000 plus the RMD.



If his RMD were 90,000, he could take out the 150,000 needed and just roll 60,000 back to the IRA within 60 days. He will have satisfied his RMD for the year and paid off the loan. The only pitfall would be if he has already done a rollover from or to the IRA account within the prior 12 month period, exhausting that option.



Your client could do a $150,000, 60 day rollover and then satisfy his RMD by the end of the year. That is if he hasn’t done a rollover in the past 12 months as of Jan 08.



From a practical standpoint, that probably could be done, but from a technical standpoint the first distribution satisfies the RMD requirement (if it is a distribution and not a direct transfer). Since it is deemed to satisfy the RMD, it is not an eligible rollover distribution. A rollover of the RMD amount then becomes an excess contribution to the receiving IRA account, and must be corrected under the excess contribution rules.

A later distribution that year would not include the earnings on the excess contribution for the time it was in the IRA, and the IRA custodian would not normally be told to code the distribution as a corrective distribution. Since IRA custodians do not report the dates of distributions, and IRA RMDs can be aggregated, this usually escapes IRS detection.



Alan:
I think I get it. He can do this but it sounds like that he cannot roll back his RMD amount even if he is planning on taking it by 12/31/2008. His RMD for 2007 was approx. 60,000. It will be different for 2008 but based on that are you telling me that he would not be able to roll back into the IRA within 60 the 60,000? If he does then he might escape the IRS scrutiny but he might not is that correct.



Yes, that’s correct.



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