Highway to the Danger Zone

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

My son is 14. I make every effort to expose him to a wide array of cultural elements. A variety of music. Plays. History. Food. Movies from the 80’s and 90’s are a significant slice of the “Understanding Social References” pie chart. Ferris Bueller’s Day Off, Breakfast Club, Shawshank Redemption, Terminator, Sixteen Candles. Currently queued up on the DVR is Top Gun. Goose and Maverick pushing the limits in their F-14 Tomcat fighter jet. Iceman. Jester. “Never leave your wingman.” Kenny Loggins singing “Highway to the Danger Zone.”

If a person wants to recklessly fly through the jet wash of the 60-day rollover window and use their IRA funds for some risky pursuit, they better stick close to their advisor wingman. Peril lurks. Engines could flameout. Taxes and early withdrawal penalties may apply. Proper advice, guidance and support is paramount. Timing is everything. There is no ejector seat or parachute to save a botched rollover. A steady stream of private letter rulings (PLRs) indicate that the public continues to dance with danger when it comes to IRA rollovers.

PLR 201548026. A man going through a divorce was sure his soon-to-be ex-wife was about to file legal action against him and take his IRA funds. In an effort to hide his retirement dollars, he took a distribution from his IRA, but forgot to deposit the money back into the IRA before the 60-day rollover window expired. No IRS relief. Crash and burn.

PLR 201332016. Money is withdrawn from an IRA. The sale of a home is imminent. Cash from the sale will be used to replace the withdrawn IRA assets before the 60-day rollover window closes. Danger! Warning lights flashing! The house doesn’t sell quick enough. Window closed. Engine flame out! Taxes due on the withdrawal. No ejector seat.

PLR 201506016. A gentleman surrounds himself with a team of financial and real estate “experts.” He withdraws cash from his IRA with the intent on buying an investment property and redepositing the asset into his IRA. Bad advice. Not only would this transaction have been disallowed, but the team forgets to put the property back into the IRA before the 60-day window expires. Jet wash! Plane goes into a flat spin! Taxes due, and assets no longer qualified.

But not all risky rollovers end in disaster. You can fly below the hard deck or inverted over a MiG-28 and live to tell about it. In a fabricated example – Snake Eye Susie withdraws $10,000 from her IRA to cover the buy-in at the World Series of Poker Tournament in Vegas. She wins $50,000 and rolls the original $10,000 back into her IRA before the 60-day window closes. Snake Eye flies her jet into the sunset, two swirls of exhaust spiraling behind.

Churn-n-Burn Charlie withdraws $100,000 from his IRA and deposits the cash into his non-qualified brokerage account. He uses the money to increase his margin rate and subsequently buys as much stock as possible based on a tip from his uncle Pump-n-Dump Pauly. After a month, with his stock worth $1,000,000, Charlie sells out, and rolls $100,000 back into his IRA. He will account for the $900,000 profit in his non-qualified brokerage account during tax season. Charlie buzzes the IRS’s ivory tower with a flyby.

If you feel the need for speed and want to play chicken with your retirement dollars, that is on you. Be forewarned. The IRS has no mercy if you miss the 60-day rollover window without cause. They will rain down taxes and penalties. In addition, a person is allowed only one IRA-to-IRA rollover per 365 days, so don’t make a habit of it. As mentioned, proper guidance from a competent and experienced financial advisor is vital.

The 60-day rollover: highway to the danger zone. Do not leave your wingman!