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Borrowing from an IRA

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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 The key here is that you have to replace the withdrawn funds within 60 days to avoid paying income tax and possibly the dreaded 10-percent early-withdrawal penalty.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 59&frac12. 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 Even if tax is withheld, you can replace the full amount ($10,000 in the example above) and avoid paying tax on the withdrawn funds.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.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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