By Andy Ives, CFP®, AIF®
By the look of everyone’s Facebook and Instagram photos, it appears we are all flying Gulfstream jets around the world, relaxing on far-away beaches and lighting Cuban cigars with twisted-up $100-dollar bills. Is the economy really doing that well for everyone? Are we all participating in these boom times? Of course not. Living paycheck to paycheck is commonplace. In fact, many people try to access whatever retirement nest egg they do have to cover expenses and emergencies happening right now. Foreclosure notices are issued. Student loans pile up. A child gets sick and health coverage only goes so far. Emergency funds are required immediately.
Financial desperation has many faces. Oftentimes, people play a dangerous game of chicken by dipping into IRAs. The common thought is to use those retirement dollars within the 60-day rollover window to thwart whatever financial demon blocks their path. If the money is redeposited in time, taxes and possible penalties can be avoided.
How can those rollover dollars, that “money in motion,” be used during the once-per-12-months, 60-day rollover period? Pretty much any way (within the law) the owner chooses. If an IRA owner elects to empty their account and bet it all on black at a roulette table in Las Vegas, hoping to pocket the winnings and roll the withdrawn dollars back into their account before the 60-day rollover window closes, they can do that. If they want to buy Bitcoin in their non-qualified brokerage account or triple-short the Market with an exotic ETF, they can do that, too. None of these activities are prohibited. If the money is rolled back into an appropriate retirement account within 60 days, no questions are asked.
Only the amount distributed can be rolled over. A client who gets lucky at the casino is limited to rolling back only the amount that was distributed from the IRA. For example, Zoey takes a distribution of $40,000 from her IRA. She uses the funds as her entry fee into a poker tournament and for travel expenses. The cards are kind and she wins back everything, plus $20,000. Zoey can only roll over the $40,000 that was originally distributed from her IRA.
A recent true-life court case revealed the extent some folks will go when faced with financial ruin. (Richard L. Jones, Debtor, United States Bankruptcy Court, Southern District of Illinois, No. 18-31532, April 15, 2019.) Mr. Jones withdrew $50,000 from his IRA and bought lottery tickets in an attempt to stave off bankruptcy. Alas, his tickets were losers and he could only roll $20,000 back into his IRA. He owed taxes and penalties on the $30,000 he couldn’t return. A single-color bet on a roulette table in Vegas suddenly sounds like a much better tactic. The odds would have been in Mr. Jones’ favor vs. a lottery ticket. “A dollar and a dream” is by no means a legitimate retirement strategy.
Playing chicken with retirement assets is a dangerous game. Using retirement dollars within the 60-day rollover window for legal personal gain is neither fraud nor a prohibited transaction. Risky, but not against the rules. As mentioned, desperation has many faces, and countless people are willing to take that risk. If you are not lighting your cigars with twisted $100’s, if you find yourself in dire financial straits, be smart about it. Identify the odds. Know the rules. Stack the deck in your favor. And remember, what happens in the 60-days, stays in the 60-days.