Borrowing From Your Future

Posted on Posted in blog

Borrowing From Your Future was Originally Posted on August 14, 2010 by

This will be brief and generic because I am not a financial advisor nor expert.

I was less than 59 and 1/2 and needed to borrow money to set up a farm. There are 3 ways to remove money from an IRA. Before reaching 59 and 1/2 you CAN remove money without a penalty if you do a 72T which involves taking 5 substancially equal payments from the account. There are formulas and you may have to take more than 5 payments. You cannot stop this process once started, even if you reach 59 and 1/2 along the way.

Secondly, once you are 59 and 1/2 you can remove money from your IRA without penalty. You do not have to remove any money though.

Once you are 70 and 1/2 it appears you MUST start taking money out based upon life expectancy.

In these cases above, it appears you pay TAX on the money but no penalty if done property.

In my case, the majority of my money was in one big IRA, which had the 72T taken from it. I believe that should I have split the money into two IRA’s I would have frozen the first with the 72T but been able to remove money from the other one I hit 59 and 1/2. Check with a Retirement Tax expert about this as it may be a reason to have 1 or more IRA accounts, even if they are invested the same.

Another almost unheard of way to borrow money (prior to being 59 and 1/2) is to use your 401K. I set up what is known as a SOLO 401K with a company called PAI. It allowed me to transfer $100,000 into a retirement account that I managed as an employer, and the one and only employee was me!Because it was a “company” plan, I could allow the employees (me) to borrow funds and pay them back with interest. That interest actually goes back into my own 401K.

I was able to borrow up to $50,000 that way from myself and pay myself back the interest.

The yearly cost for the loan was a couple hundred dollars. I paid it back quarterly. The requirement for this has to be that you (and/or) your spouse are the only employees! If you are self-employed, this is a great way to have a 401K. You should note that if you take a loan, you must make payments (in my case quarterly). Should you not do that in a timely manner, IRS makes gives you the penalty as an early distribution!

So that now you understand a couple of things, let me tell you what happened to me.

I set up the 401K and got $50,000 to help manage the farm. I could have gotten a better deal if I had been buying the farm with that money. I then needed more so I set up the 72T and had it removed from 1 big IRA. My other IRA’s are small.

So I have a 401K quarterly payment due and am tight on cashflow. So I figured since I was now 59 and 1/2 I could take extra from the IRA while I am forced to continue taking the scheduled amount. WRONG!

I looked to my 401K and the loan is mostly paid off, but can only take the remainder of what I had paid back as a second loan! NO! That increases my quarterly cashflow and does not solve the problem.

So here is what I did. I borrowed money from a friend to pay off the 401K loan. Once the loan is paid off, I can take lots more out of the account. The first step is to repay my friend. I will have 20% witheld from my withdrawal for taxes (which I’ll get back when I file) and there is a limit of withdrawal to what was invested at the beginning.

I have been lucky to have had money put aside, although I wish I had put lots more away, but I was lazy and ignorant. Hopefully those reading this who are still working will review what they are saving and try to do better. Certainly in this economy it is difficult but don’t leave it to others to look out for you. I’ve said it here before, a good start on saving money is to listen (and call in) to the Clark Howard radio show. Visit http://ClarkHoward.Com or see his show on HLN.

I hope that after all this, my farm will be worth lots when I go to sell it :-)