60 day rule
Regarding the 60 day rule that allows an IRA owner to take a distribution from his IRA and then return that distribution within 60 days to avoid both a before-age-591/2-penalty and a taxable event: as long as the amount returned to the IRA is the same amount as the distribution, is it okay if the kind of investment that is put back in is different than the one taken out? Example: say I had $100,000 in ABC stock in my IRA, I withdrew the stock from the IRA, sold it once outside the IRA, purchased $100,000 in CDs and then put the CDs back into the IRA, would this be okay?
Permalink Submitted by Alan Spross on Thu, 2008-01-17 21:24
No, that won’t fly.
Per p 25 of IRS Pub 590, “The Same Property must be rolled over.”
In your example, you must re deposit ABC stock. And equally pertinent is that the number of shares you withdrew must be returned, not an equivalent amount of shares based on changes of value during the distribution time frame. If the stock split during the distribution window, then the number of shares would be the split adjusted number.
Permalink Submitted by Tony Kondaks on Fri, 2008-01-18 17:39
Here’s why I asked the question:
I was solicited to represent a program to my clients that offers a hedge against downturns on stocks held in IRAs. As I understand it, it works like this (and those that are involved in this will please forgive me if I am misrepresenting it): say you have $100,000 in ABC stock in your IRA. You take it OUT of the IRA so it becomes a non-qualified holding, you pledge this $100,000 in ABC stock to a loan company that specializes in non-recourse loans. They give you a non-recourse loan of $90,000 for a loan period of, say, 5 years at 7% interest. With the $90,000, you purchase a fixed annuity which you put into the IRA. You pay a 10% penalty (assuming you’re younger than 59 1/2) on $10,000 (the difference between the $100,000 and the $90,000 you put back into the IRA) plus the income tax on the $10,000. But the $90,000 if returned within 60 days is safely put back into the IRA without tax consequences.
According to the answer provided to my first question under this thread, the IRA owner could NOT do this as I explain above because what is being put back in is NOT the same investment…is that correct?
Permalink Submitted by Alan Spross on Fri, 2008-01-18 18:18
That’s correct. The following is copied from the IRS Regs:
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(b) Rollover contribution—(1) To individual retirement arrangement. Paragraph (a)(1) of this section shall not apply to any amount paid or distributed from an individual retirement account or individual retirement annuity to the individual for whose benefit the account was established or who is the owner of the annuity if the entire amount received (including the same amount of money and any other property) is paid into an individual retirement account, annuity (other than an endowment contract), or bond created for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution.
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The key is the definition of “other property”. Essentially, this means identical issues, not just similar issues; of course an annuity as a replacement for any equity is not even close to similar. If a parcel of real estate was distributed, that identical parcel would also have to be re-titled to the IRA within the 60 day period. If something else is rolled back, then the IRA owner has made an excess contribution and the original distribution becomes taxable. This is a bad combination of infractions.
This all sounds like yet another annuity promotion to access IRA funds. Seems it would be easier to simply sell the stock in the IRA and buy shares of a bear market fund to replace them in the IRA.