Can I Mix IRA and Personal Funds?

By Beverly DeVeny, IRA Techical Expert
Follow on Twitter: @BevIRAEdSlott

Can you mix your IRA and personal funds? Sometimes companies offer their investment products on sale. You might get a small cash bonus, a higher interest rate, or cash back if you invest today or by the end of the month when the offer ends. You might want this investment in your IRA because the investment, or the deal, is just that good. But here’s the problem. You can’t get your IRA funds out of your current investment into this new one that’s on sale before the sale ends. What are you going to do?

This is what you cannot do. You cannot take personal funds, put them in an IRA account to get the investment that is on sale, and then repay yourself when the “real” IRA funds become available. That is co-mingling your personal assets and your retirement assets. The tax code says you can’t do that. So, what have you actually done? Read on.

Let’s say the investment is going to be $50,000. You take $50,000 out of a personal account (checking, savings, a brokerage account) and put it into an IRA, which then invests in your perfect investment. You now have an IRA contribution of $50,000. The contribution limit for 2014 is $5,500 (plus an additional $1,000 if you are age 50 or older this year). Assuming you are eligible to make an IRA contribution, you now have an excess contribution of $44,500. Excess contributions are subject to a penalty of 6% per year for every year they remain in the IRA. There goes your bonus!

Now let’s look at the other side of the transaction. Assuming you wanted to pay yourself back for the $50,000 you fronted to your IRA, you took a distribution of $50,000 from your existing IRA. Your IRA custodian will report this to IRS on Form 1099-R. IRS will be looking for this income to be included on your tax return. When it is not, you can be pretty sure that they will contact you. They will take a dim view of your mixing your personal and retirement funds.

There are a couple of worst case scenarios that can occur. IRS could deem your fronting the funds for your IRA a loan that you made to your IRA and could disqualify your entire IRA account as of January 1 of the year of the transaction. Your IRA would be considered to be totally distributed and includable in your income as of that date.

The other, more likely, scenario is that you never report the 6% excess contribution penalty. The statute of limitations does not start to run. Years later, IRS comes back and assesses the penalty for each year the excess remained in the account, plus interest. They can also assess failure to file penalties for each year and accuracy related penalties, plus interest. Again, you could lose the entire IRA.

The moral of the story is that if you want to have an IRA investment, you have to use IRA funds to purchase that investment, not personal funds. Although the alternative of missing out on the investment opportunity is not an attractive option, sometimes you just have to realize that you can’t have everything that you want.