Can you borrow against your ira

By Matt Mayerle
Modified on June 7, 2023
can you borrow against your ira

If you have a fair amount of money set aside in your retirement account, you might be wondering if it is possible for you to borrow against your IRA account. While there is no such thing as an IRA loan, there may be other options that can serve as an excellent solution for your funding needs.

There are a myriad of reasons why someone might need to borrow money. Whether it is for a financial emergency or a large purchase, a short-term loan can make all the difference when you are short on cash. We will walk you through the various possibilities to borrow from an IRA and what other options might be available to you.

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.

Because of how well-protected IRAs are, the account holder’s investment earnings will steadily increase over time. Those who take full advantage of the many benefits that retirement accounts offer are likely to enjoy a comfortable retirement with minimal financial worries.

The trick to individual retirement accounts is that when account holders withdraw money, the distribution of funds becomes taxable income. The financial protection afforded to IRA account holders does not apply to early distribution. 

Is It Possible to Get An IRA Loan?

Unfortunately, it is not possible to borrow from an IRA like you might from a life insurance policy. There is no such thing as IRA loans for either traditional IRAs or Roth IRAs. While loans are possible with an employer-sponsored plan like a 401(k) account, it is not possible to borrow from your IRA in the same way. 

Withdrawing funds from your IRA prematurely could result in IRS penalties and other costs. However, there are certain exceptions wherein you may be able to withdraw funds from your IRA without an early withdrawal penalty. Even if you are able to avoid incurring penalties, there may be other consequences that make withdrawing your earnings early a bad idea. It is important that you carefully consider all your options before taking money out of your retirement account.

What Options Are There for Accessing IRA Funds?

There are several options available for accessing your traditional or Roth IRA funds if you wish to. It should be noted that all of the options for early withdrawal come with consequences, as you may lose some of the tax-free benefits you receive on the money from your IRA. In the end, you are the best judge for determining if the benefits outweigh the drawbacks.

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

Short-Term Rollovers

A very short-term loan may be possible through an IRA rollover. Through a rollover, you can borrow from your IRA as long as you can pay the money back quickly. The loan amount must be returned to the IRA within 60 days or less to avoid an early distribution penalty. 

Typically, 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 it is possible for people to change their minds, the IRS rules do not prohibit placing the money back in the same IRA it was removed from.

In a direct rollover, the funds will be moved directly from one IRA to another, but in an indirect rollover, you will be receiving the money first before placing it in another account. An indirect rollover could allow you to withdraw money and return it to your existing IRA within 60 days without penalty.

IRA Withdrawals For Specific Needs

While you typically need to wait until retirement age to withdraw funds from your IRA without penalty, there are certain circumstances where exceptions might apply. 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

A Roth IRA works a bit differently from a traditional IRA. When depositing money into a Roth IRA, you are contributing cash that 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. 

If you need to access your Roth IRA funds before you reach 59½ years of age, you can withdraw up to the amount of what you deposited without needing 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

Despite it being possible to obtain the money you need from your IRA, that does not necessarily mean you should. There are several consequences and drawbacks to withdrawing cash from both a traditional or Roth IRA.

Costly Penalties

The 10% penalty for early withdrawal will also be applied to you if you do not return the money to your account during indirect rollovers. You could also end up paying this steep penalty if you don’t precisely match the qualifications for an exemption or accidentally withdraw earnings from your Roth IRA.

Losing Potential Growth

When you take money out of your account, you will be diminishing your returns and potential growth. Your retirement plan might be set off track and leave you with less money than you planned to have when you reach retirement age. 

Other Financing Options

If IRA loans don’t offer the financial help you were seeking, there are other funding options available to you. At one point or other in their lives, everyone experiences unexpected financial emergencies where they might need a bit of help to get back on their feet again.

Here are a couple of suggestions for attaining the funding you need when you’re experiencing a minor financial crisis:

A Personal Loan

A personal loan could be an excellent solution in certain circumstances to borrow some money. Most personal loans are unsecured loans that are paid back in monthly installments. Personal loans are incredibly versatile, coming in all shapes and sizes for all manner of borrowers. There has been a growing abundance of new online lenders who are willing to lend to borrowers of many different financial backgrounds. 

If you are concerned about the state of your credit report, there are many personal loan options for subprime borrowers. Loans for bad credit online will likely have higher interest rates which can make them most costly than other loans. Figure out how you plan to afford to pay the loan back before signing any contract so you don’t end up with debt you can’t afford to pay off.  

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. You might be surprised how willing they are to lend you money, so you don’t have to pay interest on a loan. 

Dealing with financial matters with family members can be tricky if you don’t clearly communicate the needs and expectations surrounding the loan. Talk through exactly when you will get the money back to them and create a plan for any difficulties that might arise. 

Emergency Fund

An emergency fund is a personal finance necessity. If you don’t already have an emergency fund set up, we highly recommend that you build one once you are back on your feet. An emergency fund could make it, so you don’t need to worry about borrowing money next time you hit an unexpected expense. 

$1,000 is a good amount to start with for a beginner’s emergency fund. Open a separate savings account and start depositing as much as you can spare each month until you reach your goal. You can always increase the size of your emergency fund once your needs and income evolve. 

Once you have a savings account dedicated solely to emergencies, you won’t need to consider dipping into your retirement account or borrowing a high-cost loan anymore. You’ll simply be able to pull out the money you need from your emergency fund and replace it when you’re able after the crisis has passed. 

Can You Borrow Money From Your IRA?
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