Borrowing money from IRA – everything you need to know

Borrowing money from your IRA might seem like a good idea if you desperately need the funds at a given time. Doing so, however, incurs a premature withdrawal penalty of 10%, and the withdrawal will be considered as income and therefore be fully taxed. Many people choose to “borrow” money from their IRA to settle their outstanding tax debt. However, it is usually a better idea to talk to IRS tax relief specialists before deciding to withdraw any funds from your retirement account. This is due to the fact that IRAs do not allow for loans. Instead, you will have a 60-day period to repay or roll over the funds you withdraw. In this article, we will explain exactly what is the process associated with borrowing money from IRA, explain the 60-day rule, as well as any associated fees and taxes.

What is IRA?

Individual Retirement Accounts (IRAs) present a tax-advantaged way to save up for your retirement. They are a form of long-term investment that offers a way to reduce your taxable income for the year. You can contribute to an IRA up to a certain limit. This limit is $6,000 in 2022, and it increases if you are older than 50. To put it simply, having an IRA is one of the key steps to retirement planning. Another thing worth noting is that it is also possible to open an individual retirement account even if you already have a 401(k) account from your employer.

coins on a tax form
IRAs present a tax-advantaged way to plan your retirement.

The contributions to your IRA are tax-deductible but come with income limitations. For example, you can only get the full deduction up to your contribution level if you are earning $68,000 or less. And you will also need to have a retirement plan at work. For married couples filing jointly, this limitation is $109,000 or less.

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Can you borrow money from IRA?

Technically speaking, it is not possible to borrow money from IRA. The IRS does not present taxpayers with the option to directly take a loan from their IRAs. However, what most people consider to be borrowing from their individual retirement account is utilizing the “60-day rollover rule”. This rule presents the taxpayers with the ability to finance their other loans, investments, or certain expenses in an emergency. It is not a way to cut your tax bills, as you will be paying taxes either on withdrawals or contributions, depending on the IRA type.

For example, if you have owned a Roth IRA for more than five years and are above 59 and a half years of age, you can freely withdraw any contributions without any tax penalty. Do note that this applies to contributions only, not earnings such as dividends. This is due to the fact that Roth IRA requires you to pay all the necessary taxes on your contributions once you make them, as opposed to a traditional IRA where your contributions are tax-deductible. Withdrawing money from a traditional IRA will incur all the associated taxes.


a ledger
You always need to be on the lookout for advantageous acts.

Depending on the situation, the rules for borrowing money from IRA may be changed. A prime example of this is 2020’s Coronavirus Aid, Relief, and Economic Security (CARES) Act, section 2202. This act allows taxpayers to withdraw funds up to $100,000 from their IRAs, provided that the funds are used for coronavirus-related purposes. These funds will then need to be deposited back into an IRA but the time limit is three years. While you utilize the CARES Act to protect your income from taxes in full capacity anymore, there is always the possibility of a similar act being enacted in the future. The option you do have, however, is to utilize a 60-day rollover rule.

60-day rollover rule

For most people, the 60-day rollover rule is synonymous with borrowing money from IRA. This rule allows for tax-free rollovers from any IRA to another IRA or to a different retirement plan. Provided that you can deposit the withdrawal to another eligible account within 60 days, you will not incur a premature withdrawal penalty and your withdrawal will not be taxed. If you fail to do so, your money will be fully taxed and may incur a 10% early withdrawal penalty if you are below the age of 59 and a half years.

While the rule’s intention is to allow taxpayers to roll over some of their funds into another retirement account, the fact that you have 60 days to do so effectively allows for borrowing money. However, there are certain risks and limitations to doing so.

Risks and limitations of the 60-day rollover rule

If you withdraw cash, you will need to deposit cash.

First, it is only possible to perform a rollover once within an entire year. If you happen to have multiple IRAs, all of them are treated as one IRA when it comes to the 60-day rollover rule. You will also need to deposit the same assets that you withdraw, meaning that if you withdraw cash you will need to deposit cash. You may also only withdraw eligible amounts from your IRA.

Lastly, if you happen to only roll over a portion of your withdrawal, any difference will be taxable. It may also incur additional charges.

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Borrowing money from IRA – Taxes and fees

Rollovers are non-taxable. This means that you are free to transfer money from one account to another without any penalties. If you do so within the 60-day period, that is. Of course, for the process to be completely tax-free, you will need to deposit the exact same amount as your withdrawal. If you fail to do so, the difference will be fully taxable as income, and incur an early withdrawal penalty of 10% if you are below 59 and a half years of age.

Additionally, withdrawals may also be subject to custodian charges and penalty fees, depending on the specific IRA. As a general rule, the more time passes before you make your first withdrawal, the lesser the charges will be. After a certain time period, there will be no charges whatsoever. But this varies from custodian to custodian. In some cases, there will be a flat fee for every withdrawal even if you manage to deposit the funds back in time.

If you do not manage to redeposit your money, the entire sum will be subject to taxation, as well as the possible 10% penalty. However, if this happens, the entire transaction does not count as a rollover. This means that you can have another opportunity to “borrow” the money from your IRA.

The process of borrowing money from IRA

Most of the time, people borrow money from their IRA to finance a home or a rental property purchase. Therefore, you may want to know what the process entails in this exact case.

a house, symbolizing why people are borrowing money from IRA
Purchasing a home is the #1 reason why people borrow from their IRA.

To start the process, you will first need to check if your property is eligible for financing. After that, you will need to complete the loan application and provide your bank with the recent IRA statements. You will then need to review any procedures and documents that your IRA custodian requires.

After you and your custodian sign the necessary paperwork, you will be able to get funds directly transferred from your IRA to the bank. You will want to make sure that your IRA has a minimum policy term of one year, and that it is insured. The bank will require you to provide policy copies and the invoice. If everything is in order, the bank will approve your loan. Before you can finalize the process, make sure to have your IRA custodian read and approve all the real estate documents.

Should you be borrowing money from IRA?

Generally speaking, no. The best thing you can do, in most cases, is to leave the funds safely within your IRA. There are no guarantees that you will be able to meet the 60-day rollover period, after all. What you may want to do instead is consider other options. For example, if you have a Roth IRA, you can freely make a withdrawal from the initial investment. Or you can turn to your friends and family for an emergency loan. Borrowing money from IRA needs to be your last resort.

With that in mind, if you are absolutely certain that you can repay the withdrawal in 60 days, go for it. Just make sure to account for any possible delays. If there are public holidays coming up, for example, that can delay the process for a few days. While the IRS allows for certain extensions, you can’t count on them. You may be able to get an extension if you get sick, for example, but the IRS may also deny it. Lastly, if you happen to go bankrupt during those 60 days, you will still need to pay all the penalties and taxes on the amount you withdraw. While borrowing money from IRA is possible, it is definitely something that you want to avoid if you can.

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For more information on IRAs, tax relief, tax relief companies, and anything relating to taxes, simply explore the Consumer Opinion Guide. We are there to help you make the best financial decisions possible!

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