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Can I borrow from my IRA?

can you borrow against your ira

It’s not possible to borrow from your IRA. However, borrowing from an employer-sponsored 401(k) plan may be possible. Depending on your financial services provider, you could withdraw money or rollover funds from your retirement account. Although, you may have to pay IRS penalty fees and other charges. 

About 18% of working-age individuals have an IRA.1 If you have money in your IRA account, learn more about what you can do with your retirement funds below. 

What Is an IRA?

An IRA is an individual retirement account. Individual retirement accounts offer individuals amazing tax benefits when building their retirement savings. Some of these tax advantages include tax credits, tax deductions, and tax deferrals. Individuals under 35 typically have $31,070 in their account, and 35 to 44 year olds have $131,950.2

Because of how well-protected IRAs are, the account holder’s investment earnings will steadily increase over time. Those who take full advantage of retirement financial accounts’ many benefits can avoid worrying about retirement.

IRA vs. Roth IRA

Below are the key differences between these two accounts. 

FeatureTraditional IRARoth IRA
ContributionsPre-taxPost-tax
Taxation at WithdrawalTaxableTax-free
Age at Mandatory Withdrawal72None
Early Withdrawal PenaltiesYesOnly on earnings
Borrowing Rules60-day rollover ruleContributions anytime

Is It Possible to Get An IRA Loan?

Unfortunately, there’s no such thing as IRA loans for either traditional IRAs or Roth IRAs. While you can withdraw funds prematurely, this could result in IRS penalties. There are certain exceptions wherein you may be able to withdraw funds from your IRA without an early withdrawal penalty, but there may be other consequences.

What Options Are There for Accessing IRA Funds?

Here are a few of the options you have for accessing your individual retirement funds:

Short-Term Rollovers

Rollovers are used to “roll money” between a 401(k) or IRA to a new retirement account. This can be used to consolidate multiple accounts or change your broker. The account holder removes the IRA money from the account and must deposit it in another qualifying IRA within 60 days. Since people can change their minds, the IRS rules do not prohibit placing the money back in the same IRA it was removed from.

IRA Withdrawals For Specific Needs

While you typically need to wait until retirement age to withdraw funds from your IRA without penalty, there are exceptions. The 10% penalty for removing funds before 59½ will be waived if any of the following circumstances: 

  • To pay for qualified higher education expenses.
  • Health insurance premiums while the account holder is unemployed.
  • The IRA owner has become totally and permanently disabled.
  • To reimburse medical expenses that exceed 7.5% of the account holder’s gross income.
  • Up to $10,000 for qualified first-time homebuyers.

However, it should be noted that you will still need to pay income tax on the money that has been taken out of the retirement account.

Roth IRA Withdrawals

When depositing money into a Roth IRA, you contribute cash you’ve already paid income taxes on. Since your Roth account is made up of after-tax dollars, you are able to withdraw funds without paying income tax on the distribution. 

Suppose you need to access your Roth IRA funds before you reach 59½ years of age. In that case, you can withdraw up to the amount of your deposit without having to pay taxes or penalties. However, if you withdraw any investment earnings, you will still be subject to the 10% penalty unless you qualify for the exemptions listed above for traditional IRAs.

Consequences of Early Withdrawals

These are possible consequences of withdrawing cash from a traditional or Roth IRA.

  • Costly Penalties — If you do not return the money to your account during indirect rollovers, the 10% penalty for early withdrawal will also be applied to you. 
  • Losing Potential Growth — When you take money out of your account, you will be diminishing your returns and potential growth. Your retirement plan leaves you with less money than you planned to have when you reach retirement age. 

Alternative Financing Options

Here are a couple of alternative financing options:

A Personal Loan

A personal loan provides lump sums that are repaid in monthly installments. Most lenders offer same day online loans for convenience. If you are concerned about the state of your FICO Score, know there are many personal loan options for subprime borrowers, such as bad credit loans and no credit check loans. However, comparing interest rates is critical to avoid costly loan offers. 

Friends Or Family

If you have reliable and caring friends or family members in your life, you can ask if they would be willing to help you out during this difficult time. However, dealing with financial matters with family members can be tricky. Talk through exactly when you will get the money back to them and create a financial plan for any difficulties that might arise. 

Emergency Fund

An emergency fund is a personal finance necessity. If you don’t already have one, we highly recommend that you build an emergency fund by using the 6 month savings challenge. Open a separate savings account and start depositing as much as you can spare each month until you reach your goal. 

FAQs About IRA Loans 

How much can I actually borrow from my traditional IRA?

While you can’t directly borrow money from a traditional IRA, you can orchestrate a short-term, 60-day IRA rollover for urgent needs. Remember, the sum depends on your account’s value, and it’s crucial to redeposit the funds to avoid taxes and penalties. 

What are the typical fees when I withdraw IRA funds early?

Withdrawing money from an IRA ahead of time doesn’t involve direct ‘fees,’ but you’ll face tax implications and potentially a 10% early withdrawal penalty. The specifics can vary, so consulting a financial planner is a smart move to understand the full financial impact.

Can I borrow money from my IRA more than once?

Technically, you’re not ‘borrowing’ but conducting a rollover, which can be done only once per year across all your IRAs due to IRS regulations. Frequent withdrawals might raise red flags, so consider seeking guidance from a financial advisor.

What happens if I can’t return the money from an IRA rollover within 60 days?

If you don’t return the funds within the 60-day window, the IRS considers the money as an early distribution. This scenario triggers income tax on the amount and possibly a 10% penalty if you’re under 59½, barring specific exceptions. Always plan ahead to ensure timely repayment.

Who is eligible to initiate an IRA rollover?

Any individual with a qualifying retirement account can initiate a rollover. However, rules are strict, and the one-rollover-per-year rule applies universally, not per IRA. To avoid complications, ensure you’re fully informed or get assistance from your financial provider.

Are there different rules for borrowing from a traditional IRA vs. a Roth IRA?

With a Roth IRA, you can withdraw contributions (but not earnings) at any time, tax-free and penalty-free, because you’ve already paid tax on that money. For an IRA, early withdrawals generally incur taxes and penalties, with some exceptions. 

What’s the process for repaying an IRA to IRA rollover?

Repayment involves redepositing the money into the same or a different qualifying retirement account within 60 days. It’s not a ‘repayment’ in the traditional loan sense but a strict redeposit to avoid hefty taxes and penalties. Coordinate with your financial services provider to ensure a smooth process.

Where can I find more detailed information about early IRA withdrawals?

Contact your IRA provider for information before you withdraw money from your IRA. You can also find resources on the IRS website about various retirement plans.

Can someone act as a guarantor or co-borrower for my IRA?

Nope, IRAs are individual accounts, meaning everything is in your name only. There’s no option for guarantors or co-borrowers. 

What happens to my IRA if something happens to me?

The account becomes part of your estate if you pass away with an outstanding amount from a 60-day rollover. The handling can get a bit complex, so it’s a good idea to keep your paperwork in order and consult a financial expert. 

Where can I find tools to calculate how much I can borrow from my IRA or a list of approved 
lenders?

Actually, IRAs aren’t like traditional loans, so there’s no concept of ‘approved lenders,’ and you don’t really ‘borrow’ funds in the standard sense. However, many financial websites offer retirement calculators to help you figure out your finances. 

Is there an interest rate when I borrow from my IRA?

Not exactly. Since you’re not borrowing in the traditional sense (more like taking and replacing with a 60-day rollover), there’s no interest rate involved. But be cautious — not returning the funds on time means taxes and penalties.

Final Thoughts From CreditNinja on Borrowing From IRA

While it’s not possible to borrow from your IRA, you may be able to withdraw funds early. However, withdrawing money early can disrupt your retirement plans and result in costly penalty fees. The good news is that there are alternative loan options to consider. 

At CreditNinja, we offer online loans with flexible repayment plans and competitive rates. We work with all types of credit scores, so apply today to see if you qualify! 

References:

  1. Who Has Retirement Accounts? | Census
  2. Average Retirement Savings By Age | Edward Jones
  3. Can you take a loan from an IRA? | Fox Business
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