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Borrowing from an IRA
Dear Tax Talk:
If I borrow from my IRA this month and repay it before the end of
the month, are there any taxes owed? Thanks.
Caro
Dear Caro:
You've tapped into an often-overlooked short-term lending source:
borrowing from your own individual retirement account.
You can withdraw funds from your IRA for up to 60
days tax-free. This is especially helpful if you expect a bonus
down the road but need money now. The key here is that you have
to replace the withdrawn funds within 60 days to avoid paying income
tax and possibly the dreaded 10-percent early-withdrawal penalty.
Obviously, the replaced funds don't have to be the same funds that
you withdrew.
You can only make the withdrawal once within a one-year
period from each IRA that you have. For example, if you have two
IRA accounts you can withdraw funds from each for up to 60 days
within one year but you cannot withdraw from one more than once
in a year.
Some IRA custodians will want to withhold income tax
on the withdrawal, especially if you're under age 59½. What
this means is that if you withdraw $10,000, the custodian might
withhold $1,000 in federal income tax and you'll only get $9,000.
If you only replace $9,000 within the 60 days, you'll be taxed and
possibly penalized on $1,000, the amount withheld.
To avoid withholding, you need to elect on Line 1
of Form
W-4P not to have tax withheld. Even if tax is withheld, you
can replace the full amount ($10,000 in the example above) and avoid
paying tax on the withdrawn funds. The $1,000 withheld in this example
would be an additional credit on your Form 1040 against your overall
tax liability.
-- Posted: Jan. 2, 2003
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