IRA and Tax Dilemma

Submitted by Nina Garrido on Thu, 2009-01-22 21:28

February 16, 2007 my spouse and I spoke to a representative at a local credit union to see if we could borrow against an IRA Account. Our reason being, we have plans to purchase a commercial property in the near future. The credit union representative’s response was, yes, we could borrow against an IRA Account and to let her know when we are ready. With this advice, we established both our IRA Accounts with the credit union.
April 2, 2007 we received a call from our real estate agent that we are ready to close escrow on the commercial property and funds need to be wired this same day. We walked into the credit union with the intent to obtain this loan against our IRAs and wire funds. We were assisted by another representative, the representative who initially assisted us was with a member. We told this representative that we are here to obtain a loan against our IRA Accounts and wire out funds for this purchase. She said this was not possible and we both panicked. We asked to speak to her manager. We explained to her manager that his representative, no name mention, advised us that we could borrow against our IRA and we are here to do so. He flat out said this was not possible and walked away without recommending other avenues. We were both caught in a catch 22 and had a lot in stake if funds are not wired. We will lose our earnest deposit. My husband then asked the representative assisting us, so what can we do, her reply was, Mr. Garrido don’t worry. The funds being wired remains an IRA Asset since you both did not have access to any of the funds. This lead us to believe that the property being purchased with these funds also becomes an IRA vehicle. She handed us pre-completed withdrawal forms to sign and went off to wire the funds.
January, 2008 we received our 1099R forms and low and behold it list our transaction as a distribution. We immediately called the credit union to request they amend the 1099R and since then it has been a nightmare.
We now know and hopefully this is right, that if the credit union amends the 1099R to reflect a transfer, we could re-characterize the transaction and amend the purchase for benefit of IRA.
I have been agonizing over this for the past year and hope you can assist me. We had been misrepresented twice and the credit union refuse to admit to their error. Oh, the representative took funds out of our ira accounts, deposited it into our regular savings account and then wired the funds. We did not know this until after the fact.
Nina Garrido



Submitted by Alan Spross on Thu, 2009-01-22 22:04

This CU does not understand IRA basics and/or have done a poor job of training their Reps.

There are no formal loans allowed from IRA accounts, but the popular vernacular sometimes includes references to borrowing from an IRA. This so-called borrowing means taking an IRA distribution, using the funds temporarily for no more than 60 days, and then rolling the funds back to the IRA or another IRA. You can do this once per 12 month period per IRA account. If you fail to rollover the funds within 60 days you will have incurred a taxable distribution. Either way, a 1099R is issued reporting the distribution, but if you rolled the funds over, you show it as a rollover on your Form 1040. In your initial discussion with the CU Rep, there was evidently a failure by each of you to identify whether this distribution was to be permanent or just used during a 60 day rollover.

In your later talks with the CU, you also do not indicate any reference to rollover of the funds vrs a permanent distribution.

While an IRA can be used for real estate purchases, this creates several potential pitfalls. There are a few specialty IRA custodians who offer what are referred to as “self directed IRAs” in which the custodians hold your IRA funds and they are invested in various real estate investments, none of which can include any personal use of the properties by the IRA owner whatsoever. If you were dealing with one of these IRA custodians, and the funds are still held in an IRA account by one of them, you may have a valid 60 day rollover. But you should have an IRA agreement showing your RE investment if this were the case, and that IRA custodian must issue a Form 5498 showing the receipt of an IRA rollover contribution. Is this the case or not?

Even if it WERE the case, it was not done by direct transfer because the funds were first deposited into your savings account, which is not an IRA. Therefore, the CU must issue the 1099R showing the distribution, and that leaves you with either a taxable distribution and probably an early withdrawal penalty OR if you have completed an IRA Rollover, the simply report it on line 15 of your Form 1040.

Submitted by Jose Morales on Fri, 2009-01-23 00:42

So you asked for a loan against an IRA which is not allowed (regardless of what any employee told you), were told twice that it was not allowed (after one employee told you that it would be allowed, in error), still insisted on having funds wired to make this purchase, and signed a distribution form which most likely had all the necessary legal disclosures informing you of what a distribution was and the possible tax consequences?

Submitted by Denise Appleby on Fri, 2009-01-23 06:32

[quote=”ninag49″]February 16, 2007 my spouse and I spoke to a representative at a local credit union to see if we could borrow against an IRA Account. Our reason being, we have plans to purchase a commercial property in the near future. The credit union representative’s response was, yes, we could borrow against an IRA Account and to let her know when we are ready. With this advice, we established both our IRA Accounts with the credit union.
April 2, 2007 we received a call from our real estate agent that we are ready to close escrow on the commercial property and funds need to be wired this same day. We walked into the credit union with the intent to obtain this loan against our IRAs and wire funds. We were assisted by another representative, the representative who initially assisted us was with a member. We told this representative that we are here to obtain a loan against our IRA Accounts and wire out funds for this purchase. She said this was not possible and we both panicked. We asked to speak to her manager. We explained to her manager that his representative, no name mention, advised us that we could borrow against our IRA and we are here to do so. He flat out said this was not possible and walked away without recommending other avenues. We were both caught in a catch 22 and had a lot in stake if funds are not wired. We will lose our earnest deposit. My husband then asked the representative assisting us, so what can we do, her reply was, Mr. Garrido don’t worry. The funds being wired remains an IRA Asset since you both did not have access to any of the funds. This lead us to believe that the property being purchased with these funds also becomes an IRA vehicle. She handed us pre-completed withdrawal forms to sign and went off to wire the funds.
January, 2008 we received our 1099R forms and low and behold it list our transaction as a distribution. We immediately called the credit union to request they amend the 1099R and since then it has been a nightmare.
We now know and hopefully this is right, that if the credit union amends the 1099R to reflect a transfer, we could re-characterize the transaction and amend the purchase for benefit of IRA.
I have been agonizing over this for the past year and hope you can assist me. We had been misrepresented twice and the credit union refuse to admit to their error. Oh, the representative took funds out of our ira accounts, deposited it into our regular savings account and then wired the funds. We did not know this until after the fact.
Nina Garrido[/quote]

I feel bad for you. It is not easy for people who are not familiar with the IRA rules to decide what is wrong and what is not. They rely on the financial institution to tell them the right thing, and trust that they are. I imagine some IRA owners feel like some of the patients/patients-families in House and other medical dramas, when they are told the condition is a hematoxinopedia something. They think- the doctor must know, so let’s go along with it.
As urusei2 indicated, if you signed the distribution form, it likely included a disclosure to the effect that you agree that the amount is a distribution and that you have consulted with your tax-professional. The question now becomes, can it be fixed?
If you have documented proof or other evidence that the credit union informed you as you explained, then you can attempt to get this rectified by escalating the matter. However, consider that pursuing the matter may not be worthwhile if:
The rollover option is the solution and you do not have the funds to put back in the IRA, or
The IRA investment option is the solution, but you have a case of prohibited transaction (see Alan’s post about self-directed IRAs).
It sounds like you are talking about a large sum of money, which means you stand to lose on a large scale if it cannot be fixed. Of course, ‘large’ is relative, but at some point – the cost of correction is not worth it if the amount is small. If you think it is work putting some time, and spending some money (maybe even a few thousand dollars) to try to get this fixed, then you need to start talking to someone who can help you now.
Something like this requires hand-holding by someone who is not only familiar with the IRA rules, but knows if, how and when it can be corrected. Some fact finding needs to be done. Maybe your tax professional can help or can recommend someone?
Good luck

Add new comment

Log in or register to post comments