An Individual Retirement Arrangement or IRA is a good way to save money for retirement years and benefit from a tax break on the money you deposit (for a traditional IRA) or eventually withdraw (for a Roth). You can also take advantage of tax rules that allow you to withdraw money from the account -- temporarily. The key is to pay close heed to the 60-day deadline the IRS sets for repayment.
You may withdraw and replace money with a traditional or Roth IRA. If you return the money within 60 days, there is no tax or early-withdrawal penalty on the "loan," which the IRS treats as a tax-free rollover. The 60-day period begins on the day after you make the withdrawal, and it includes all calendar days. Note that the original amount withdrawn from a Roth IRA is not subject to taxes or penalties, as the money invested is still subject to income tax.
If you miss the 60-day deadline, the withdrawal becomes a taxable distribution, and you will also pay a 10 percent early-withdrawal penalty if you are still younger than age 59 and 1/2. You do not pay the tax immediately or automatically. Your account manager reports the distribution to the IRS, and you also must declare the distribution on Line 15a of your 1040 tax return for the year in which you received the distribution. If you re-deposit the money within 60 days, you enter 0 on Line 15b ("taxable amount").
You can only use the tax-free withdrawal feature once a year. If you make such a withdrawal, and then make another within a year, the IRS treats the second is a taxable distribution, no matter when you replace the money. The one-year rule applies to any second distribution, even if used for ordinarily tax-free reasons such as health care or education.
Collateral, Margin and Rollovers
You cannot use the funds in your IRA as collateral for a loan. Nor can you leverage the funds within the IRA for the purpose of trading investments on margin. If you use IRA to loan money to a business, the IRS will take a close look at the transaction and may disqualify it. However, you are allowed to borrow from the IRA, close out that account, and then roll the funds over into a second account. You still must meet the 60-day deadline, but the rollover will not be taxed.
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