IRA 60 DAY TRANSFER – HOW TO WORK AROUND LIMITS
A 53 year old client has a single large rollover IRA at our firm. Due to lack of cash in non retirement accounts, he needs to draw funds from the plan to pay a variety of bills over differnet timeframes. He may not be able to pay some of these back within the 60 day limit and understands the tax/penalty issue.
I am trying to make sure we legally work around the “one transfer per year” rule but give him the funds he needs.
I plan to subdivide the one IRA into many smaller IRA’s using the unlimited rollover rule. He will then request a transfer from one IRA at a time. The rule, as I udnerstand it, does not allow multiple transfers from a single IRA but does not prevent a client drawing from separate IRA’s.
That way, I feel the client can withdraw from each IRA for his tranfer needs to pay bills and each transfer will be treated separately. Is this a viable workaround?
Permalink Submitted by Bruce Steiner on Wed, 2008-07-30 23:31
If he takes distributions in the form of substantially equal periodic payments, and continues to do so at least until he reaches age 59 1/2, he can avoid the penalty on early distributions. If he has a large IRA and not enough other liquid assets, he may wish to consider this.
I wrote an article on this for the February 2000 issue of Estate Planning: http://www.kkwc.com/docs/AR20041012155030.pdf
Permalink Submitted by Alan Spross on Thu, 2008-07-31 01:08
Robert,
You seem to be using the terms “rollover” and “transfer” somewhat interchangeably. A taxpayer can have unlimited direct transfers, so he could indeed create several IRA accounts by direct transfer, and then be able to roll funds out and back within 60 days to each account once per 12 month period. I think this is what you meant, and done on a limited basis can be a viable solution.
However, the IRS has never blessed short term loans, and if this plan is carried to extremes, it is possible that the IRS could conceivably challenge it using a form of illegal “step transaction” philosphy. There is no way to define how many accounts would be a red flag, but a 1099R and 5498 is issued for each rollover per account, and exceeding 3 or 4 might trigger a response. In addition, there will be no exception to the 60 day rollover deadline when the purpose of the distribution is short term use. The IRA has established that in numerous PLRs.
If he fails to roll back the funds in time, the distribution will be taxable, but it could also relieve the debt pressure.
If he simply needs more fund for a majority of the 6.5 years he would have to adhere to a 72t plan, the plan may be a viable idea. But if he simply has a lot of bills now that he can not restructure over a longer period, he may be better off taking the distribution and paying the penalty. Most people with habitual debt problems and up busting their 72t plans before they can be modified and incurring retroactive penalties and interest. The best solution here relates to a more detailed analysis of his situation.