You can take a tax free loan from your Individual Retirement Account (IRA) if you are less than 59 and 1/2 years old, however the Internal Revenue Service (IRS) requires that it should not actually look like a loan. You can withdraw money from an IRA and have the use of it for a specific, exact 60 days . . . with no exceptions (except things such as death, disability, jail, bank errors, etc.). So you have to put it back on time. And you can only do this once per year for each IRA.
By processing the paperwork to take funds from an IRA, withdrawing the money and then replacing it before the 60-day limit, your transaction will be treated as a “roll-over,” as if you had actually moved money from one retirement account to another. The 60-day limit begins the day after you take the money out of the IRA and ends exactly 60 days later. The time limit ends whether that last day is a Saturday, Sunday or a holiday. Because of these restrictions, the safest course is to put the money back into the IRA on about day 57 or 58 to be absolutely certain you meet the requirement. There are some anecdotal stories that illness, emergencies, etc., are not acceptable excuses to the IRS, and that the time limit is absolute.
If you make some form of a mistake and keep the money beyond the 60-day limit, you will pay a 10 percent penalty for the withdrawal and you will probably owe Federal income tax, state income tax and possibly local taxes.
You report this transaction to the IRS on Form 1040, line 15a, IRA Distributions. Then on line 15b you enter “0” and write “rollover” in the margin.
A brief description of this “home made” loan process is available from “The Motley Fool” website. “The Wall Street Journal” describes this financial technique at their “Smart Money” site. The IRS description of this “rollover” is available in the official Publication 590, “Individual Retirement Arrangements.” On the opening page, scroll down about half way to the category “Can You Move Retirement Plan Assets,” then as a subhead scroll to “Rollovers.” Careful reading of the section will explain for you how the distribution and replacement of the funds can meet the IRS requirements.
Obviously, this is not a process that should be taken lightly. If a person really needs the money quickly and readily, it is an option that can be completed rather easily. Replacing the distribution within the 60-day time limit is very important because the penalty is substantial and the tax burden may be far more than any interest that might be paid on a bank loan or a credit card charge. It’s good to know about this though, because it may be a useful method to cope with a very short term cash need.
Sources:
IRS Publication 590
“Wall Street Journal, Smart Money”