Interest rates are as low as I’ve ever seen them – and I’m old. I’m not quite as old as the two major party presidential candidates were, but that statement is “damning with faint praise”, as my mother used to say. I turned 74 the day after election day and, in my lifetime, only one U. S. President has been younger than I. Regardless of my age, when I log in to my computer, I keep seeing graphics that assure me that I can get a 15-year mortgage for 2.25% (which I would presumably pay off when I reach 89). A quick Google® search tells me that I can get a personal loan (either secured or unsecured) for as low as 5.99%. What a great time to be a borrower!
But I can get a 60-day, no-interest, loan from myself with the blessing of Uncle Sam! What’s the catch? The loan has to be for 60 days or less; any longer and I pay through the nose. How do I go about accessing this bargain?
First, I need to have an Individual Retirement Arrangement (IRA) that contains enough money to satisfy my short-term loan need.
Second, I have to withdraw 120% of what I need from that IRA. The reason I must withdraw 120% of what I need is that Uncle Sam will withhold 20% of what I withdraw for federal income taxes. This withholding is insurance in case I default on my “loan”. So, if I needed $100,000, I would have to withdraw $120,000 from my IRA.
Third, I have to return the full amount I “borrowed” ($120,000 in the example contained in the previous paragraph) to my IRA in no more than 60 days.
If I complete all the above steps, I’ve just gotten the use of my money for 60 days at no cost whatsoever. What could possibly go wrong? I’m sure that you and I can think of lots of things that could go wrong. There are many things that can keep us from returning the full amount of our withdrawal to our IRA within the 60-day period. In the following paragraphs, I’ll explain more about this loan, which, in IRS parlance, is called a “60-day rollover”.
Way back, in the old days when I was in my 30s and the IRA was a new creation of the tax code, anyone was allowed to roll money from one tax deferred account to another and not have to pay any taxes or penalties if the rollover was completed within 60 days. Multiple rollovers were allowed each year.
By the time I was 50, the rules had changed. So-called “60-day rollovers” were still allowed, but 20% was withheld for federal income tax in case you didn’t roll the money over within the designated 60-day period. Direct transfers (from one tax-deferred plan into another) had no withholding.
More recently, the rules were tightened up even more. Only one 60-day rollover from IRA to IRA per person was allowed once every 12 months. But you can still do one of these rollovers each 365 days. And that’s where the no-interest loan comes from. If you take money from any IRA and roll it over into another tax deferred account (or even put it back into the account from which you took it) within the 60 day period, there is no tax or penalties due.
IF you need a short-term loan AND you know you will be able to pay it back within 60 days, THEN consider taking an interest-free loan from your IRA by means of a 60-day rollover. BUT be aware of the problems if you can’t repay it within 60 days.