My wife and I are thinking of loaning a portion of our SEP/IRA to a family member so he and his wife can buy a house. The money we provide would, of course, be pre-tax dollars. When would we be taxed -- upon withdrawal of the entire amount from our SEP or as we receive monthly mortgage payments? Thanks for any advice!
First of all, how in the world do you and wife have a SEP/IRA? Do you mean that each of you have your own separate INDIVIDUAL accouns? Note that's what the I in IRA stands for. Anyway..... Unless all the contributions to all IRA's are pre tax, any withdrawals will be taxable in the ratio of total to deductible portions, plus there could be a 10% excise tax (penalty) on your withdrawals if before the time you're 59
1/2. ChEAr$, Harlan Lunsford, EA n LA
Very BAD plan. Pledging your IRA account as collateral or loaning any of it out would result in IMMEDIATE disqualification of the tax deferred status of the account. All taxes would become immediately due, plus a 10% penalty (possibly 25% in the case of a SEP-IRA). Of course, if you are over age 59-1/2, you could withdraw whatever you want, pay the tax, and then loan the money. With the understanding that it CANNOT be redeposited back in the account, unless done within 60 days of the withdrawal. In making such a loan you are jeopardizing your retirement plan, unless you structure the transaction as a valid mortgage. Interest needs to be charged and you will pay tax on that. Loaning significant money to a friend or family member is usually a bad idea - unless you are willing to lose it all (then it becomes a gift). There is a reason that banks charge the interest rates and fees that they do!! Final point - you and your spouse DO NOT have a JOINT account. There is no OUR in IRA. Either you each have an account or the IRA belongs to one or the other of you. There is an "I" in IRA, it stands for INDIVIDUAL. Back to the drawing board.
Possibly immediately, and on the total value of your IRA's, not just the income. If the family member is a lineal ancestor or descendent, the transaction is a prohibited transaction and terminates your IRA. If the family member is not a lineal ancestor or descendent, then income would be taxable when distributed from the IRA. The loan payments would be payable to the IRA, not to you personally. As a separate note, you may have trouble finding an IRA custodian who will allow this transaction. Ira Smilovitz
For those pension-type plans that allow withdrawls for a home purchase, it has to be a home owned by the taxpayer (optionally with a spouse) that is the same taxpayer that the plan benefits. You can't make a qualified loan for a relative's property. Also note that the traditional plans and IRAs VARY as to which plans allow a $10k home acquisition withdrawl or not - not all of them do. [This is in addtion to 3+ responses already yelling at you for other problems....]
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