Updates

The risky IRA ‘loan’ clients ask for

Oct 29th, 2018

Clients in need of a short-term cash influx may be tempted to dip into their IRAs and repay themselves rather than seeking out a lender. Often, they’re under the impression that tapping an IRA works like taking a loan from a 401(k). The reality is much more complicated.

Any money your client withdraws from an IRA must be deposited back into the account or another IRA within 60 days of receiving the distribution. Otherwise they could owe taxes on the sum. If they are under 59 1/2, there may be an additional 10% tax penalty. Clients who tap a Roth IRA’s earnings could be in the same position, and they can only make one such rollover in any 12-month period, regardless of how many IRAs or Roth IRAs they own.

With such a short borrowing window, it may seem like this risky strategy wouldn’t appeal to clients, but several advisors say they’ve have fielded inquiries about it. If you’re in a similar boat, here’s how to help clients who are set on the idea of taking and then undoing a distribution.

“I don’t recommend this type of thing to clients,” says advisor Chris Baker, co-founder of Oaktree Financial Advisors in Carmel, Indiana, but nonetheless he has advised a couple people who went through with withdrawals. “I’ve seen this mostly centered around real estate transactions, like when someone wants to purchase a new home but hasn’t closed on their current home. They need to get their hands on money now but believe when the home does sell they will have the funds to put back.”

Read more: The Risky IRA ‘Loan’ Clients Ask For

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