IRA Withdrawal for Home Purchase / 60 day IRA rollover period

Submitted by David Dunn on Mon, 2019-12-16 18:23

Facts:
Husband age 58.5, wife 60
Husband ROTH 260k, Trad IRA 450k
Wife 60k ROTH and 90k Trad IRA
Community property registered non-ira investment account 1.4M. 465K long term unrealized capital gains.
About to close on purchase of new home for 450k on 2019-12-30

Home purchase not contingent on sale of their existing home so need to come up with cash to close.

To fund cash to close, client would like to avoid selling from the non-IRA account to avoid triggering long term capital gains, but will do so if necessary.

Husband considering withdrawing 200k from his traditional IRA to fund cash to close. Then would rollover the 200k back to the IRA before the 60 day rollover period when current home sells. However it is likely the sale on their current home would not close in time to generate the cash before the 60 day rollover period ends. Given real estate market conditions they are expecting a fast close, but not that fast.

To avoid missing the 60 day rollover deadline, client could always sell from non-IRA account to generate the cash to complete rollover as worst case scenario.

But here are two questions:

1. Could the client take an additional withrdrawal from the SAME traditional IRA to complete the original rollover before the 60 day rollover period expires? Or does the withdrawal need to take place with a different IRA, or different owner (wife)?

2. Any reason the client couldn’t take a distribution from their ROTH IRA account to complete the rollover?

The ultimate backstop to avoid paying ordinary income taxes and penalties on withdrawing IRA funds for home purchase is to take distribution from non-IRA account. Just looking for ways to avoid do this.

Thanks for your help!

David



Submitted by Alan - IRA critic on Mon, 2019-12-16 19:36

  1. Note that when the IRS restricted the one rollover rule 5 years ago, all IRA accounts all treated as one combined account, therefore only ONE distribution can be rolled over within a 12 month period. Therefore, client could not take an additional IRA distribution from any of client’s IRAs including Roth IRAs and expect to have more than one distribution eligible to be rolled over. However, client’s spouse is a different IRA owner, so client’s spouse could also use their one rollover, if available. That would provide an extra 60 days.
  2.  Since all client’s IRAs are treated as one including Roth IRAs, a Roth distribution could be used to fund the first rollover, but then could not be replaced since the one rollover permitted would already have been used.
  3. Note that if the allowed rollover is completed, and client receives the sale funds but cannot do the second rollover, the second distribution will be taxed, but since a conversion does not count as a rollover for purposes of the one rollover limit, client might as well convert the second distribution and that would eliminate the 10% penalty AND provide continued IRA tax deferral in a more tax favored Roth instead of a TIRA. 
  4. If the wife takes an IRA distribution that cannot be rolled back, there would be no penalty on hers since she is over 59.5. 
  5. If taxable brokerage assets are sold, perhaps the higher cost basis assets can be used to minimize cap gain taxes. Or perhaps a bridge loan would be a better alternative.
  6. Real estate closing dates when an IRA 60 day rollover deadline is at stake creates a toxic mix since there are too many possible reasons for delay. And do not expect any IRS relief since the whole purpose of the one rollover restriction was to stop borrowing from IRA accounts. 
  7. I assume that the new home does NOT qualify as a first home under IRS Rules, but it might if the house they are selling was not their main home for the last 2 years.

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