We need some funds for [reason]. Can we source those funds from our Roth IRA or Traditional IRAs using a 60-day rollover?
You are permitted one 60-day rollover per 12-month period. If you are successful in redepositing the funds before the deadline, then the rollover is not be a taxable event. However, I would advise against using this feature.
60-day rollovers carry with them the risk that you miss the recontribution deadline. Missing the deadline makes your “rollover” treated as just a withdrawal, incurring taxes and penalties for a traditional IRA and losing the tax-free status of a Roth IRA. Additionally, if the 60-day deadline is missed, it can take years or decades to put back the withdrawn amounts through the regular annual contribution limits.
The most common successful usage of a 60-day rollover is funding a down payment for the close of a new home before the sale of an old home. The circumstances normally seem perfect. Withdraw the funds 2-3 days before the close of the purchase. Close on the sale a week or so later. Redeposit the funds before the 60 day deadline.However, even in these rosy circumstances where the return of funds is near guaranteed, several investors tragically miss the 60-day deadline due to minor obstacles.
In even rosiest circumstances, my experience has been that 60-day rollovers are stressful, and the re-contributions occur nerve-rackingly close to the deadline, if the deadline is met at all. Closing dates change. Funds have holds on them that delay movement. Maximum mobile deposit limits are exceeded. Banking holidays or weekends delay processing. Sixty days is often too short.
If we are not in rosy circumstances and repayment is possible but not known, it only increases the strength of my recommendation to look elsewhere for the funds.
Instead, before you do a withdrawal from your Roth IRA, I’d recommend that you investigate other funding options.
For one, you could ask a friend or family member to loan you the money. A standard agreement would be, for example, a family member loaning you the money amortized over 5 years. This is equivalent to saving for the withdrawal retroactively over the loan term. If the interest rate for these types of loans comply with the current Applicable Federal Rate (AFR), then they are gift tax neutral. Best practice also includes writing a loan agreement outlining the terms like the principal amount of the loan, the repayment schedule, the interest rate, and contingency plans for default or early repayment. In my experience, loans without written agreements normally run into problems later while those with agreements succeed because of the documentation.
If you do decide to withdraw from Roth, I encourage you to calculate your current contribution basis and keep that in mind when picking the amount you withdraw. Your contribution basis can be withdrawn at any time tax and penalty free. If you withdraw under that dollar amount, you can strive to meet the 60-day deadline but mitigate some of your costs should you miss it.
For more on this topic, you could read our article series on Roth Contribution Basis.
Photo by T Steele on Unsplash
