Can I Borrow from my IRA?

by | Mar 16, 2017

If you want to borrow from your IRA, there's good news and there's bad news.  First, the bad news:  You absolutely can not borrow from your IRA.  Period.  There's no flexibility on the matter.  Borrowing from an IRA is a clear-cut prohibited transaction, and doing so will cause the IRS to declare the money you "borrowed" to be "distributed", quite probably leading to taxes, penalties and interest.  But there is some good news...

 

Yes, borrowing from an IRA is 100% prohibited.  No question about it.

If you do "borrow" from your IRA anyway, here's what happens:

  • If your IRA is a "traditional" IRA, you'll owe income tax on the money you've withdrawn
  • If you're younger than 59 1/2, you'll owe a 10% early withdrawal penalty
  • If you don't realize that IRA withdrawals are taxable and do it anyway, you'll probably owe interest to the IRS as well

The bottom line is that by the time the IRS is done taxing and penalizing you, making early withdrawals from an IRA just doesn't make much sense.

But you do have some options:

Option #1:  If you have a Roth IRA, you're entitled to make a tax- and penalty-free withdrawal of any sum up to the amount you contributed to the IRA.  But note:  This is a withdrawal, not a loan.  This means you can not replace the money in the account at a later date.

Option #2:  If you have a traditional IRA and you own and operate a small business, you could establish a "Solo 401k" to replace your IRA, then you could borrow from your 401k.  This is one of the advantages of the 401k over the IRA:  It's not strictly prohibited to borrow from a 401k.

Option #3:  Why do you want to borrow from your IRA?  If it's due to medical expenses, college expenses, purchase of a first home, or several other specific reasons, you can make an IRA withdrawal without paying the 10% penalty.  But note again that this is a withdrawal, not a loan, so you won't be able to put the money back in the IRA later.  Also, even though you won't have to pay the 10% early withdrawal penalty, you'll still be obligated to pay income taxes.

Option #4:  This one is risky, and I mention it only for reference, and not as a recommendation.  The IRS allows you to withdraw money from your IRA and then redeposit it into another IRA account without any taxes or penalties.  This is called an IRA rollover.  But the money must be placed into the new IRA within 60 days to avoid taxes and penalties.  So if your need for money is absolutely, positively less than 60 days, using your IRA money during that 60 day IRA Rollover period could work for you.  But I think this is incredibly risky and don't recommend it.

There you have it:  4 ways to borrow - or otherwise access your IRA funds - before retirement.

But here's my advice:  Don't do it.  Leave your retirement funds in your retirement account and find some other source of capital if at all possible!

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