When looking for sources of capital to leverage as passive income earning assets, I stumbled upon a Roth IRA passive income generation method I want to share with you. And luckily, this trick is not limited to Roth IRAs. It can work with Traditional IRAs as well.
What I love about this trick is that you can make use of assets you own but supposedly can't touch. You don't have to wait until you're 65 to make a little bit of passive income every year from your funds!
Disclaimer: I am not a CPA or any kind of certified financial planner! I am just your average person who loves to research investing, loves FIRE, loves technology, and loves to share what he’s done with all of you. Copy me at your own risk!
Short-term loans you can use for passive income
This trick is made possible by an IRS-allowable maneuver called a Rollover.
A Rollover allows one to remove their funds from an IRA without tax implications or penalties if those funds are returned back to an IRA within 60 days.
This process is primarily used to move funds from one IRA to another.
However, the IRA you return your funds to can be, in fact, the same IRA they were removed from. Per IRS regulations (emphasis added),
Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period...
Some people have used this technique to provide themselves a short-term loan. And that’s precisely what I’ve been using this trick for! Except that in my case, I temporarily invest it for short-term DeFi staking rewards. Don’t worry, I’ll describe this later.
Remember, this trick can only be performed once per year, per IRS regulation.
Nevertheless, I still use this trick once per year, which provides enough passive income to pay one month’s worth of my expenses. Alongside the credit card passive income trick, I now have 20% of my annual expenses covered with just a few mouse clicks! Not too bad when you're trying to fast-track your way to financial independence!
How to use your Roth IRA for passive income
Here’s how it works.
Choose an amount of funds you want to remove from your IRA account. If you want to play it safe the first time (or any time, for that matter), try a smaller amount, like 5% of your funds.
If the account is employer-sponsored, multiply this number by 20%. This amount you need to have on hand during repayment of the IRA loan (don’t worry, you get this 20% back from the IRS). If your account is not employer-sponsored, don't worry about this step.
Withdraw the funds from your IRA and immediately transfer them via ACH transfer to your Crypto.com Fiat Wallet.
Once your funds hit the account, buy a stablecoin (USDC/USDT/DAI/etc.) equivalent.
Begin a 1-Month Staking period with those coins to start generating passive income.
After your 1-Month Staking period ends, convert your stablecoins back into USD and withdraw funds to your bank account.
Return your funds (along with the 20% extra for employer-sponsored accounts), back into your IRA as a rollover contribution and ensure this gets noted on your year-end tax return.
What can go wrong?
Delayed bank transfers
There are some significant penalties that can hit you if you don’t pull this off correctly. That is why I recommend your first try should be with a small amount of money. This allows you to test some bank transfer times that could otherwise leave you with big taxes and big penalties if you miss the 60-day window.
The primary mistake that can be made is waiting too long to remove your funds from Staking and return them to your IRA within the 60-day window. If you go past 60 days, you will lose your IRA benefits. In other words, there goes your IRA tax advantages. Kapoof. Not to mention, you are hit with early withdrawal penalties on the order of 10%, and that lump sum will be hit with income taxes at year’s end.
This technique is not for the faint of heart. Nevertheless, it works. That’s why my compromise is a conservative Staking period of 1 month (despite having a 60-day window).
In my experiments, my IRA withdrawal to my checking account took 4 business days. The transfer to my Crypto.com account took 1 business day via ACH transfer. And my withdrawal back to my bank account and IRA took another business day.
In theory, I should be able to squeak another 3 weeks of Flexible Staking rewards out of this cycle. However, I leave 3 weeks (instead of 4 days) for this process, just in case bank transfers hit some snafu I was not prepared for. This provides 1.5 weeks on both sides of the Staking transaction to give me plenty of buffer to ensure I don’t run too close to the 60-day time limit.
One Rollover per year
You are only allowed to perform this trick once every calendar year, per IRS regulation. Therefore, you want to think hard and make sure you won’t need to do any rollovers for any other reasons during the next calendar year!
The other implication of this rule is that it doesn’t matter how many IRA accounts you have. You only get one rollover per year, period. So, if you have both a Roth IRA and a Traditional IRA, you cannot perform a rollover on each account. Sadly, all of your IRA accounts should be treated as one account, and thus you can only do this trick once per year from one account.
Besides a feeling of risk, the only downside to this procedure is a bit of added tax reporting. But honestly, it is pretty minimal.
You’ll get a Form 1099-R, documenting the taxable distributions you took. You’ll enter this into Form 1040 as taxable IRA distributions. But then you also indicate you performed a rollover and (if the rollover was the same amount) thus you have no added tax burden.
A pretty interesting little trick for accessing a chunk of funds you might have had slowing building value, but which felt un-touchable.
Now, you can build a bit of passive income from your Roth IRA, keep your funds in the account for the remainder of the year while it continues to accrue value and maintains its tax advantages.
If you're interested in getting some bonuses during sign-up...