Borrowing From (and Repaying) Your IRA

Written by: Christy Rakoczy

Many people are familiar with the idea of borrowing from a retirement account because you are able to take a loan on a 401K.  For those interested in borrowing from an IRA, however, it is important to understand the rules are very different.

An IRA is intended to help you save for retirement and you are able to make tax-free contributions to an IRA with the idea that you will not begin taking money out of the account until you are at least 59 ½. If you try to take money out early, you’ll generally need to pay taxes and penalties.  This is why people try to borrow from the account- to access the money that is in it without being hit with the fees and penalties.  Unfortunately, IRAs are not set up for this and while there is a way to temporarily take money out, it is fairly risky to try.

How to Borrow from Your IRA

Unlike with a 401K where you are able to take a five-year loan and pay it back over time, there is no option to take an IRA loan. However, you do have the opportunity to roll over your IRA and you have 60 days to do it. This means you can technically take a very short-term loan from the IRA for a period of as long as 60 days.

When you take money out of your IRA to roll it over, you can withdraw it and use it for whatever you would like without paying taxes and penalties but you absolutely must put the money back into an IRA within that 60-day time period. The 60-day clock starts from the day that you receive the money and you need to make absolutely sure you put the money back on time. If you are even a day late, the withdrawal of the money will no longer count as a rollover but will instead be considered a distribution. This would mean you’d be subject to regular income taxes as well as a 10 percent penalty if you are under the age of 59 ½.

There are other limits as well when it comes to using this rollover option to take money from your IRA. For example, you can use this tax-free rollover option just one time within a 12-month period, with the clock starting on the day that you get the money. If you take any other cash out of your IRA during this one-year period, it will be treated as a withdrawal and subject to taxes and penalties.  This limitation applies even if you’ve moved the money into a new IRA account.

Should You Take Money from Your IRA?

Due to the risks of penalties and taxes if you don’t pay the money back on time, it is usually a very bad idea to try to use the rollover rules to borrow from your IRA.

While you can take a limited amount of money out of the IRA to cover a first home purchase; to pay health insurance premiums when unemployed; and/or to cover higher education costs, you should otherwise avoid taking money out of an IRA- even to borrow it- unless you are at least 59 ½ and eligible to take regular distributions.


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Borrowing From (and Repaying) Your IRA

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