You can't do any of this without the government getting into
the act, however. Remember, IRAs let your money grow tax-deferred.
To the fed's way of thinking, because they're allowing you
to avoid capital gains taxes for some 60 years with your IRA, they
have a say-so in what happens to the money in the meantime.
The rules and regulations pertaining to IRAs are covered in IRS
publication 590, a mind-numbing tome with some 80 pages. But,
according to Mike Busse, a senior vice president of Harris Trust
& Savings Bank in Chicago, the mechanics are quite simple:
"You can withdraw the assets from one IRA and use the funds
for 60 days before redepositing them without creating a taxable
event."
Such a transaction is called a "roll-over." Since most
of the rules covering rollovers deal with the transfer of assets
from one IRA to another IRA owned by the same individual, financial
experts like Busse get just a tad uncomfortable with the idea of
taking money out of one IRA and putting it back into the
same one.
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"When someone does use their IRA to, in effect, give
themselves a loan, a transaction which it was never designed for,
it might be safer to go from one account to another as opposed to a
round trip in the same account."
The ultimate downside, if things don't turn out as planned,
really isn't so bad-as long as you don't mind losing a
little money. In the case of McCain, let's say she withdraws
her $1,000 and promptly buys $1,000 of inventory. Further suppose
there's a fire in the apartment next door, and her entire
inventory is lost to water damage. Let's further assume that
she has apartment insurance, but, alas, the settlement becomes
protracted, and by the 60th day, she still doesn't have the
money, and, worse yet, hasn't been able to make any sales
because there simply isn't any demand for soupy rouge.
According to Busse, the IRS will levy a 10 percent penalty on
the amount she withdrew, which in this case would total $100. In
addition, the $1,000 early withdrawal would be added to her total
income in the year in which she took it and subsequently taxed. If
McCain happens to be in a 28 percent bracket, the failed maneuver
would cost another $280 in income taxes. In sum, she'll pay
close to $400 in penalties and tax, and she will have suffered a
total loss on her retirement savings of $1,400.
This may sound like peanuts-especially to a risk-oriented
entrepreneur-but Busse says that it could be quite expensive and
financially dangerous for someone older with more assets involved.
"What if the person involved wasn't 25, but 50, and the
amount in question was $100,000 instead of $1,000?" If things
go south, the penalty would be $10,000 and the taxes in a 34
percent bracket would be $34,000. "A loss like that so close
to retirement could have a lasting impact on someone's quality
of life during retirement," says Busse.
What should you take away from all this? Think hard about other
alternatives before turning in this direction. But recognize that
when you lack other options, sometimes there's more risk in
playing it safe than there is in actually taking a risk. McCain has
come around to this way of thinking. "If I lose all the money,
it won't change my life one iota," she says. "But if
I succeed, the sky's the limit."
Originally published in the June 2000 issue of Entrepreneur Magazine
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