Rule allows penalty-free IRA withdrawal

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Dear Dr. Don,
Can you borrow against your IRA and avoid any tax consequences and the 10 percent penalty — as long as you put the money back within the 60-day time period? In essence, wouldn’t it just be a short-term loan?

In other words, isn’t there a way to avoid the 10 percent penalty? It won’t be one of the qualified reasons for a withdrawal, but I figured it doesn’t matter as long as I place the money back into the IRA within 60 days.
— Sam Stipend

Dear Sam,
You can’t borrow against your IRA account, but you can withdraw funds for 60 days without being subject to the 10 percent penalty tax. If you need the money for 60 days or less, an IRA withdrawal can act as a short-term loan.

Here’s how it’s presented in IRS Publication 590, “Individual Retirement Arrangements”:

Rollover From One IRA Into Another
You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.

The IRS publication goes on to explain the possible variations on this theme, but if you’re simply withdrawing and then reinvesting the funds within the 60-day window, the plain-vanilla explanation above describes the process.

Ideally, you’d want to avoid the complication of the withdrawal being subject to withholding taxes. The Bankrate feature “Borrowing from an IRA” explains how you can elect not to have the tax withheld using Line 1 of IRS Form W-4P and how you can finesse the issue if the custodian does withhold taxes.

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