Early IRA Withdrawal and the 60-day Rule

It's common to make errors when you make early IRA withdrawals, causing you to pay a penalty and pay untimely IRA taxes. An early IRA withdrawal, i.e. a withdrawal from an IRA prior to age 59 1/2, is likely the most common reason for penalties. Let's first define certain terms and then we'll study how to guard against these mistakes:

Trustee transfer – when you have one IRA custodian (e.g. a bank or securities firm) directly transfer your IRA to another custodian. You don't have access to your money. This can be done as frequently as you want. This is the most preferred way to transfer your money from one custodian to another. Therefore, if you are thinking of making an early IRA withdrawal just to change the firm that takes care of your IRA, it's better not to. There is nothing wrong if two firms handle it amongst themselves.

A Rollover deposit – In this process, the IRA owner accepts actual custody of the amount from one IRA and takes it to another account within 60 days. This can be done just once year. You have 60 days to move the money so it follows that you can lend your IRA funds to yourself for 60 days. You have to be very careful while doing this because if somehow you forget to deposit it back, you have to pay a tax on your early IRA withdrawal (and a penalty if under age 59 1/2).

If you take extra care, this 60-day time limit can turn out to be an advantage. You can even lend yourself your IRA amount throughout the year if you divide it into small parts.

Let's assume you have $240,000 in an IRA. You can take this amount and divide it into six smaller fractions of $40,000 each (using a trustee transfer as given above). You can make an early IRA withdrawal of $40,000 from the first IRA. Within 60 days, you replenish that $40,000 by taking an IRA withdrawal of $40,000 from the second IRA and so on with the six IRAs. In this manner, you manage to extend this 60-day rule into a 360 day rule (60 days each x 6 IRAs) to lend yourself money all year round.

Just be cautious about not accessing any single IRA for more than 60 days, or perform any early IRA withdrawal more than once in a single year from any one of your IRAs. Violating either of the two will make your IRA liable to tax. (It is wise not to rely on the bank for these rules. Please consult a qualified retirement consultant or accountant).