Can You Take a Loan From Your IRA?


Putting away money for retirement is a great feeling, and most people would prefer to keep watching that money grow than tap into it early. There are many instances, however, when people do end up wanting to take a loan from their retirement savings.

can-you-take-a-loan-from-your-iraThe good news is that if you find yourself in need of a short-term loan, it is typically possible to borrow from certain qualified retirement accounts. IRAs are technically not accounts that qualify for loans, but there are methods that some people use to withdraw money from them on a short-term basis.

“Generally speaking, you cannot take a loan from your IRA as this would result in a prohibited transaction, which is in violation of certain areas of the Internal Revenue Code,” states Denise Appleby from Investopedia.com. “Some will argue that a short-term loan is permitted if the amount is rolled over to the IRA within 60 days. Technically, however, this is not a loan but a distribution and a rollover contribution.”

If you wish to take advantage of this technicality, then you can take out money from your IRA such that it is essentially the equivalent of a short-term, interest-free loan. If you do this, however, there are strict rules you need to follow in order to comply with IRS rules and not lose money in fees and penalties.

“According to the IRS, you can withdraw — tax-free — some or all of the money in your Roth IRA as long as you invest the money back into the same Roth IRA or into a traditional IRA within 60 days,” states Investopedia.com.

If you have a traditional IRA and not a Roth IRA, you can still withdraw money from it, provided you pay it back into the same account or roll it into another traditional IRA within the 60-day period. It is important to note that this is a period of 60 calendar days and not business days.

“Keep in mind that this would not be a revolving loan,” states Don Taylor, Ph.D., CFA, CFP, CASL, for Bankrate.com. “That means you could not return the funds to the traditional IRA and then take the money back for another 60-day loan.”

If you are not able to pay back the loan within 60 calendar days, you may be able to apply for a waiver or an extension. Talk to your financial institution right away if you suspect that you will not be able to pay it back, in order to determine your options and your best course of action.

In the event that you don’t qualify for a waiver or extension, then the money you took out will count as a distribution from the account. If you are younger than 59 1/2, that means it is an early distribution, and you will pay a 10 percent penalty. Depending on your age and the type of IRA you have, you may also have to pay taxes or fees on the amount.

Your financial institution or financial planner can help you determine the exact regulations for your specific IRA and can also help you decide whether you are better off taking money from your IRA or taking out another type of loan.

 

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