Is It Possible to Borrow From an IRA?

ByJulija A.
January 28, 2022

An individual retirement account or IRA enables you to put money aside for your retirement in a tax-advantaged way while giving you access to a range of investment options. In short, these accounts are designed to encourage people to save. So, can you borrow from an IRA? Although there are a few ways to get money out of your traditional or Roth IRA, you cannot borrow money directly from an IRA. 

But before going any further, make sure you weigh all your options. You’ve invested a lot of money into your retirement account, and dipping into it could have a negative impact on your retirement strategy and jeopardize the gains on your investments.

Can You Borrow From a Retirement Account?

People tend to assume that you can borrow money from an IRA because there are ways to withdraw funds and borrow from other retirement accounts. For instance, there are some 401(k) plans that allow you to take out a loan against the funds.

Unfortunately, IRAs do not allow you to borrow funds against your savings. The Internal Revenue Service or IRS enforces strict guidelines on what is and isn’t possible with IRAs. Of course, those IRS rules also extend to the removal of funds from your retirement account. That said, there are a few exceptions to help you get your hands on some cash.

Getting Money Out of Your IRA

We’re still not talking about borrowing directly from your IRA. Here are a few options for you to consider:

60-Day Rollover

A 60-day rollover allows you to roll money from one IRA to another or even the same one. As long as you can replace the funds within a 60-day period, you won’t be penalized. This may be a complex option because there are many different rules to follow. However, if you’re confident about your ability to replace the money within 60 days, this option is worth considering.

But don’t forget about the downsides. For starters, your IRA provider may decide to withhold around 10% of your IRA money for tax purposes unless you specifically instruct the provider not to. When you do place the money back, you have to deposit the full amount of the original balance, including the 10%.

If you can’t, you’ll fall behind on your taxes, and you’ll also need to pay an early distribution penalty on the withheld portion. If you can’t pay it back within 60 days, then you’ll risk a 10% penalty and taxes.

Before deciding to take this route, it’s a good idea to do plenty of research on all the potential outcomes. Keep in mind that this is a sizable risk, especially if there is even the slightest possibility of you not being able to replace the money within the 60-day period.

Taking Funds Out of a Roth IRA

If you have a Roth IRA, then you can take money out at any time without having to worry about taxes and penalties. However, make sure you’re only withdrawing the money you deposited and not the actual investment gains. If you withdraw investment earnings such as interests and dividends, you risk being slapped with a 10% penalty and income tax on that amount. However, if you withdraw your own contributions, there is no penalty.

Taking Funds Out of an IRA If You’re 59½ or Older

If you’re 59½ years old or above, you can actually pull money out of your traditional IRA without having to worry about penalties. But you will owe income taxes on the money you pull out if it’s deducted from your original contributions.

In addition, you can also take money out of a Roth IRA as long as you meet the same age requirement and have had the IRA for at least five years or more. If you meet those conditions, you can take money out of your contributions and earnings without paying taxes or penalties.

Taking Funds Out of an IRA for Exceptions

It’s worth mentioning that there are traditional IRA withdrawal rules and Roth IRA withdrawal rules that allow you to withdraw money without a penalty. Even if you’re not 59½ or older, there are some exemptions.

For example, if you need to take money from your IRA to buy a house, cover significant medical expenses, pay for higher education, or cover health insurance premiums while unemployed, the IRS will consider these as exemptions, and you’ll be allowed to do so. You should check the withdrawal rules to see if your circumstances allow you to withdraw money from your account.

Conclusion

There are a couple of good ways to access your IRA funds, but you won’t be able to borrow against it like with other retirement plans. We suggest taking another thorough look at your financial situation to see if you can avoid dipping directly into your IRA. If that’s not possible, there are a few options to withdraw from your account.

FAQ

How can I borrow from my IRA without penalty?

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You cannot borrow from your IRA, but you can access the funds through short-term rollovers if you’re  59½ or older or if you qualify for an exemption.

Can I borrow my IRA money?

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No. The closest thing to borrowing is known as a 60-day rollover and requires you to replace the money within 60 days.

How does borrowing from IRA work?

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You can’t borrow directly from your IRA, but IRS rules allow you to roll money from one IRA account to another or even back to the same one. If you do this, you must replace the money within 60 days, or you’ll face penalties and additional taxes.

Can you borrow from your IRA and pay it back?

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Yes, this is known as a 60-day rollover.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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