There are several ways to build your retirement savings. If your company offers it, there are employer-sponsored plans such as a 401(k) or 403(b). You can choose a traditional or Roth IRAs (Individual Retirement Accounts) if you are self-employed.

Each of these plans has advantages and disadvantages, but they all operate on the concept that you contribute funds when you are younger and use them when you are no longer receiving a steady paycheck. But can you borrow from an IRA?

We’ll touch on two other scenarios later in this article: rolling over your funds into an IRA If you leave your company and inheriting an IRA from a spouse, family member, or friend.

After contributing to an IRA for a while and seeing the balance grow, you might wonder if you can borrow some of that money for a home purchase or a financial emergency.

We will preface this article by saying that an IRA is designed to be a source of funds during retirement and only used as a last resort for loans before that.

IRAs do not have loans or ways to borrow from them, but some techniques will allow you to use the money. Each type of IRA has its own rules regarding accessing funds. Let’s take a closer look at IRA funds, what they mean for your income taxes, and more!

What is an IRA?

An IRA, or individual retirement account, is a way to grow your money for your future years when you’re not bringing in a regular income. Depending on the type of IRA, you can invest money pre-tax now or take advantage of tax-free growth later.

There are a few types of IRAs:

Traditional IRAs are funded with tax-deferred funds. You contribute to an IRA before you pay income tax. You can deduct the money you contribute to the IRA on your tax returns to lower your tax burden for the current year.

The money grows in an investment account until you reach a certain age. When you withdraw it, you are taxed on the amount you withdraw. A traditional IRA is an attractive plan for those who are likely to be in a lower tax bracket, as you are not working regularly.

Roth IRA is funded with after-tax compensation. The money grows tax-free (depending on market conditions). You can withdraw the money tax-free when you reach age 59 ½ and have contributed to your Roth for at least five years.

Imagine that the $1000 that you put into today grows to $5000 by the time you are 59 ½. You paid taxes on the $1000 when you were younger, and it grew by $4000. You now have $5000 in tax-free funds.  Read more about the Roth IRA.

Rollover IRA can be funded with money from an employer-sponsored plan after leaving the company. When you leave a company, you have a certain period of time to place your retirement income into another account.

If you do not roll the money into a qualified account, you may face early withdrawal penalties and hefty taxes.

An inherited IRA is an IRA that was willed to you by a spouse, family, or loved one. You can roll it into a traditional IRA and delay paying taxes, but eventually, you will need to withdraw the money and pay taxes to the IRS. 

Can You Borrow From an IRA Without Penalty?

IRAs are not meant to be sources of cash from which you can borrow money, but you can do it in certain circumstances. These methods can be tricky, so we advise that you talk to a financial advisor before considering this option.

There could be tax consequences or detrimental effects on your portfolio.

When we talk about loans from an IRA, the only limits imposed on acquiring money from your account are how much money is in your account and how fast you think you will replace the funds.

You can borrow the entire balance if you’d like, as long as you repay it before the 60-day deadline. Otherwise, here comes taxes and penalties.

The 60-Day Rule

If you find yourself in need of some cash for the short term, an IRA has a 60-day rule. We already mentioned that you could roll your investments from an employer-sponsored plan to an IRA. You can also roll investments from one IRA to another.

You have 60 days to transfer the funds to the new IRA after you initiate a rollover. During this time, you will not be taxed or imposed a penalty. So, in theory, you can use that money during this 60-day grace period and replace it before the penalty period begins.

Those at least 59 ½ years of age will avoid the penalty, but the proceeds will be taxed if you do not meet the 60-day rule. An additional tax of 10% can be imposed if you do not have a waiver from the IRS.

There are automatic waivers; you can request a waiver or self-certify that you meet the requirements for a waiver. There are fees and a process you must follow to obtain a waiver that you’ll want to consider carefully. 

Rolling Over Funds Instead of Borrowing From an IRA

While you can roll over funds to another IRA and avoid taxes and fees for 60 days, this practice has limitations and guidelines.

  1. You can only roll over funds from one IRA to another once during a 12-month period.
  2. If you roll over funds from your IRA and withdraw cash, you must roll over cash to the new IRA.
  3. There are limits to the amount of money you can roll over.
  4. If you do not roll over the entire amount into the new IRA, you can be taxed on the amount still in the original account.
  5. Different types of accounts in the IRA may have different withdrawal schedules.
  6. The custodian of your account may charge a fee for the rollover.

The funds used during the rollover period are not a loan, but you can use the money during the rollover period.

Taxes and Fees

If the rollover funds are not placed into the new account before the 60 days, the amount you did not roll over is taxed and penalized. It’s counted as income AND is subject to a 10% penalty.

The amount of taxes you will pay depends on your tax bracket. If you withdraw significant money, you may be pushed into a higher tax bracket. 

An IRA annuity is a product that provides a steady income or lump-sum payment when you retire. You pay the premium by funding it all at once or a little at a time. It has a different schedule as far as penalty fees. Annuities will typically be 7–10-year annuities.

If your annuity is in its first year, the fees will be much higher than if your annuity is in its last year. If your annuity is matured, you will not be subject to that extra charge. Check with your financial advisor to determine the taxes and fees associated with your annuity.

Failure to Redeposit Money

Money not rolled over into another qualified account is considered a withdrawal and is subject to tax. The money is also subject to the IRS penalty if you are not over 59 ½ years old.

If you did not roll over any part of the money, you did not use your rollover for the year. As a result, you can still use some of the above techniques to access your funds for other purposes.

Type-Based Borrowing FAQs

Can You Borrow Against a Roth IRA?

Loans are not permitted against Roth IRAs, but since you’ve already paid taxes on the contributions, withdrawals are non-taxable as long as you are 59 ½ and have held the account for five years. Otherwise, earnings are taxed as income and subject to an early withdrawal penalty. 

Roth IRAs follow a last in, first out method of distribution. That means it will first pay out the earnings made from the investments and then distribute your contributions. 

If you wanted to borrow from your Roth IRA to buy your first home, you could access your contributions but not the earnings accrued over the life of the account.

In that case, you would not have to return the money to the account. Remember, now that money will not earn interest for you and contribute to your financial needs later in life.

Can You Borrow From an Inherited IRA?

An IRA can be willed to heirs. You have several options if you’ve inherited the IRA from your spouse. You can roll the funds into another IRA, which delays paying taxes until later. Once you do that, you cannot withdraw the funds without paying the penalty until you turn 59 ½.

You can take the funds as a lump sum. The withdrawal is tax-free if the inherited IRA is a Roth held for at least five years. If not, you could have a high tax bill. 

You can also take the money out in increments. You will have to pay tax on what you take out, but it will be less than taking the tax hit all at once.

If you inherit an IRA from someone who is not your spouse, you have ten years from the date of the death of the person who originally had the IRA. You can take this money out slowly, but remember that this becomes income for you, and you’ll need to pay taxes on the money.

So, like any other IRA, you can’t really “borrow” from the IRA but can withdraw money while following IRS rules.

Can You Borrow Against a SEP IRA?

A SEP IRA is a Simplified Employee Pension Plan or an IRA set up by a small business owner or self-employed person. Small business owners can set up a SEP IRA for their employees, but must contribute to the account.

The employer must contribute the same percentage to their employee accounts as they do to their own. Then the employees control their own accounts.  

The rules regarding withdrawals from a SEP IRA are the same as a traditional IRA. You can roll over the funds to another IRA account and use the 60 days to avoid taxes and penalties.

Can You Borrow Against a Traditional IRA?

A traditional IRA does allow specific use of funds. If you are facing an emergency, you’ve become disabled, you are a first-time homebuyer, or you have a child, you can borrow from your IRA. 

A first-time homebuyer is someone who hasn’t owned a house in the past two years. You can also tap into your money to help a child, grandchild, or parent buy their first home. 

Remember that the withdrawal amount is only $10,000, which can only be done once in your lifetime. You will not be charged with an early withdrawal penalty and will owe taxes on the withdrawal.

Any withdrawals also reduce the balance in your account and will affect the amount you have when you reach retirement.

The Final Word

The purpose of the IRA is to save for retirement. While you can obtain money from your IRA, it is not recommended. The rollover process has a strict 60-day rule; if you miss that, you will pay taxes and a penalty. 

The Roth IRA is the easiest to liquidate if you are 59 ½ and have held the account for five years, but it’s still not a great idea. If you have an IRA and a 401(k), it’s simpler to borrow from your 401(k) as there are clear options to pay yourself back. 

Things can get tricky whenever you dip into a retirement plan, and you are short-changing your future financial self. Nothing is cut and dry, so we encourage you to take a look at the many resources and tools on our website. They are there for a reason. 😉

About the Author Tiffany Aliche

Tiffany “The Budgetnista” Aliche, is an award-winning teacher of financial education, America’s favorite, personal financial educator, and author of the New York Times Bestselling book, Get Good with Money. The Budgetnista is also an Amazon #1 bestselling author of The One Week Budget and the Live Richer Challenge series and most recently, a children's book, Happy Birthday Mali More.

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