On Wednesday, April 22, 2015 at 10:20:29 PM UTC-4, DerbyDad03 wrote:
On Wednesday, April 22, 2015 at 9:33:26 PM UTC-4, dadiOH wrote:
DerbyDad03 wrote:
On Wednesday, April 22, 2015 at 3:04:55 PM UTC-4, dadiOH wrote:
DerbyDad03 wrote:

I know a couple that withdrew a huge sum from the wife's IRA and
bought a house with it. She paid no income tax on the withdrawal.
They then withdrew the same amount of money from the husband's IRA
and deposited it into the wife's IRA. He paid no income tax on the
withdrawal. They then took out a mortgage on the house they bought
and deposited the loan proceeds into his IRA. Now they take the tax
deduction on the mortgage interest every year. Once again, it's all
in the timing of the transactions.

Roth IRAs? If not, why no tax?

Traditional IRAs, not Roths.

Aren't you also curious as to how the husband could withdraw a large
sum of money from his IRA and deposit it into his wife's IRA? (By
"large" I mean about $150K)

Yes. Do tell all...

In order to facilitate IRA rollovers, the IRS allows an individual to withdraw funds from an IRA (or other qualified retirement plan) and not pay any taxes or penalties as long as the money is replaced within 60 calendars days and as long as they don't do it more than once in any 12 month period. (They are very strict about both of those timing rules...you don't want to play around with them!)

Tom & Sue Jones found their dream home for sale by some very motivated sellers. They had some cash that they had set aside for other purposes but they needed an additional $150K to purchase the home. They had to move very quickly, even before they had put their current home on the market.

Sue withdrew $150K from her IRA and they bought the home for cash. Almost 60 days went by and their original house still hadn't sold, so Tom withdrew $150K from his IRA, gave it to Sue who used it to replace her IRA withdrawal before the 60 day period had expired. A couple of more weeks went by and their house finally sold. Tom took $150K from the proceeds from that sale and put it back into his IRA, again staying within the 60 day "rollover" grace period.

Since the purchase of their dream home had eaten into all of the excess cash they had set aside and the quick move had cost them more than they expected, they went to a bank and took out a small mortgage on the new house. Since the house had been purchased "within the past 90 days" they were able to classify the loan as "house acquisition debt" allowing them to deduct the mortgage interest.

As I said earlier, it's all in the timing of the transactions.

Allow me to clarify one point:

I originally stated: "...the IRS allows an individual to withdraw funds from an IRA (or other qualified retirement plan) and not pay any taxes or penalties as long as the money is replaced within 60 calendars days..."

To be clear, instead of "replaced within 60 calendars days" I should have said "deposited into a qualified retirement account held by the same individual within 60 calendars days".

Since the 60 day rule was put into place to facilitate rollovers, there is no stipulation that the funds must go back into the same account they were withdrawn from, they just need to go back into a qualified retirement account owned by the same individual.

The IRS also doesn't stipulate that they *can't* go back into the same account, thus allowing for what could be considered "60 day loan" from a person's IRA once every 12 months.