Hazards Associated With IRA Early Withdrawals and the 60-day Thumb-rule

It's easy to make mistakes when making IRA Early withdrawals that could cause you to prematurely pay taxes. Let's first define certain terms and then we will study how to guard against these mistakes:

Trustee Transfer -- when one of your IRA custodians (e.g. a bank or a security company) transfers to another. You do not get to access your money. You may do this as often as you want. This is an ideal way of shifting your money from one guardian to another. Therefore, if are thinking of making an IRA withdrawal just to change the firm that takes care of your IRA, it's better not to. Let the two firms take care of it.

A rollover deposit -- when you physically take possession of the money from one IRA account and deliver to another within 60 days. This can be done just once in a year. Do not forget that you can return the money in 60 days, so it follows that you can lend your IRA funds to yourself for 60 days. If for certain reasons you are not able to redeposit the amount within 60 days, it becomes liable to tax and it can be detrimental for you.

But if you take necessary precautions, the same 60 day duration for rollover can prove beneficial. You can, in fact, lend yourself your IRA money year round if you split it into pieces.

Say, for example that you have $120,000 in your IRA. You can take this amount and divide it into six smaller fractions of $20,000 each (using a trustee transfer as given above). You can withdraw an amount of $20,000 from your first IRA. In 60 days, you are able to make up for the $20,000 sum by taking a withdrawal of $20,000 from the second IRA and so forth with six IRA's. In this way, you are able to stretch the rule for 60 days over 360 days i.e. six IRA's x 60 days each to give yourself a loan throughout the year.

Just be careful not to hold onto any IRA funds for more than 60 days or make an IRA withdrawal from any single IRA more than once per calendar year. Either violation will trigger the tax on your IRA. (It is recommended not to depend upon the bank to interpret these laws. There have been some cases of incorrect information. Kindly check with a qualified financial counselor or accountant).

You can also go through other study materials if you want to gather more information on the IRA withdrawal plans.