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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Use of an IRA Rollover to Ease Financial Burden

It is well understood that an enormous amount of Americans' collective wealth is sitting in traditional individual retirement accounts (IRAs). In fact, in 2020, the value of assets in traditional IRAs was an estimated 19.29 trillion dollars!

That's an almost unfathomable amount of US wealth that is effectively tied up in accounts that have significant strings attached in terms of ability to access in times of financial need. The most notable "strings" are the imposition of income taxes on at least part of the distribution, and the early withdrawal penalty that typically applies when money is distributed from an IRA prior to the owner reaching age 59 ½ years of age.

The financial hardship many have faced as a result of the last year and a half of the Covid-19 pandemic has shined a pretty bright light on this situation. Many people, due to unemployment, business shutdowns, etc., needed an extra helping hand financially, and the IRAs they owned were a potential solution. Fortunately, pandemic related legislation provided a few options for drawing on this wealth that if properly followed could minimize the damage of having to take a distribution prior to original expectations (or penalty-free age).

Those options provided for in the covid relief legislation, however, were very focused and short-term in nature. Most are no longer available, yet the problem potentially still exists where individuals have a financial need and the main, if not only resource available, are the funds in their IRA.

One possible solution, albeit temporary, is the judicious use of an IRA rollover. This is where funds are withdrawn from a traditional IRA, used for a time and then recontributed (or rolled over) back into a traditional IRA account. Think short-term loan from the IRA, if you will, that can be valuable in a pinch.

Now, you may be thinking this is just the thing you need, and it could well be. However, before you go off and pull money out of your IRA, you need to be aware of three critical rules you will need to follow if you want to avoid the distribution from (1) being subject to income tax and (2) being hit with the early withdrawal penalty, if you are under age 59 ½.

First, and maybe the rule most violated, the money must be recontributed to an IRA within 60 days of the original distribution, otherwise it will be taxed. In the past, the IRS has given very little grace for being even a day late, so this is not a deadline to ignore. That said, there is now the possibility of obtaining a waiver of the 60-day rule if certain conditions are met. The tardiness must be due to one of eleven reasons (beyond the scope of this article) and must be completed within 30 days after the reason for the late rollover ceases to exist. Tread cautiously here.

A second requirement is that you must roll over the same property that you received from the IRA in the original distribution. This is usually pretty easy. Since most people take cash, you just must use cash to complete the rollover. However, be aware that if something other than cash is taken, such as a specific stock or security, the same stock or security must be put back.

Finally, you may only have one qualified rollover every twelve months. This rule applies to all your IRAs in total, not on an IRA by IRA basis. One - that's it for all accounts combined - for a year! And again, the IRS gives very little grace for violating this even by a day. This rule, by the way, does not limit your ability to make trustee-to-trustee direct transfers between IRAs. Since those are not considered to be a rollover, such transfers are unlimited. 

So, there you have the rules that may help you if you find yourself in a short-term financial pinch needing to access your IRA. Follow these simple rules, and you can avoid unnecessary income taxes, as well as, possible early withdrawal penalties.

Next time, we'll focus more on the early withdrawal penalty and some key exceptions to it, should you find yourself with a financial hardship of longer duration.

Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader's Choice Award for Best Accountant.

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