A recent private letter ruling illustrates the dangers inherent in using IRA funds as a source of short-term financing.
Normally, you can avoid tax on a distribution from a traditional IRA if you roll the money over to another IRA or other eligible retirement plan within 60 days of receiving the distribution. If you miss the 60-day window, the not only is the distribution subject to tax but you also may be subject to a 10 percent early withdrawal penalty.
The IRS may, but is not required to, waive the 60-day rule if you suffer a casualty, disaster or other event beyond your reasonable control. In making its decision, the IRS will consider several factors, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error and errors committed by a financial institution.
The recent private letter ruling (PLR 201118025, May 6, 2011) addressed the following fact situation involving the 60-day rule. An individual, together with his siblings, decided to help his elderly mother purchase a new residence when she developed mobility limitations. He took a distribution from his IRA and applied the funds toward the new residence. His mother then entered into reverse-mortgage financing of the new residence and used the resulting payment to repay her children.
The son had planned to roll over the amount into an IRA before the 60-day period expired.
The bank from which his mother acquired the reverse mortgage assured him that the mortgage process would be completed and the funds would be available in time for him to meet the 60-day rollover period.
Due to delays by the bank, the mortgage wasn’t processed within the 60-day period. When the son was finally reimbursed, he immediately mailed the funds to his financial institution, but the 60-day period had expired by the time the funds were redeposited into his IRA. The son asked the IRS to waive the 60-day period because his failure to timely roll over the amount was due to the bank’s numerous and unreasonable processing delays, which were beyond his control.
The IRS declined to waive the 60-day rollover requirement. The IRS concluded that the son used his IRA to make a short-term loan. Regardless of whether he intended to redeposit the funds within the 60-day period, he assumed the risk that the loan might not be timely repaid.
The IRS also noted that any errors and delays committed by the mother’s bank involved a financial institution that did not administer or transact any financial matters relating to the son’s IRA.