IRA Borrowing Rules

By Bill Herrfeldt

  • Overview

    Yes, you can borrow from your Individual Retirement Account, pay no income tax, and no interest will be charged. That will happen if you follow the rules. Don't follow the rules, and you will pay income tax on the amount withdrawn, possibly pay a 10 percent penalty, and reduce the amount you have set aside for retirement.
  • Significance

    Most people believe that once they deposit money in an IRA, it will not be available until they reach 59 ½ years of age or if the money is used for specific circumstances like educational expenses or medical bills. Actually, if you run into a temporary need for funds, you can borrow from your IRA, so long as the money is paid back in full within 60 days. This privilege is available for both traditional IRAs and Roth IRAs. If you have both, and you borrow from them, make sure that funds are replaced where they belong.
  • Time Frame

    If it takes any longer than 60 days to return the money, the withdrawal will be considered a taxable distribution and a 10 percent penalty will be imposed in addition to the tax you will pay. Furthermore, those funds cannot be put back into the IRA, thus you will reduce the amount you have set aside for retirement. In addition, you can borrow money from your IRA only once each year. If you withdraw money a second time from an IRA, it also will be considered a taxable distribution and you will also pay a 10 percent penalty.

  • Effects

    If your IRA is invested in mutual funds or stock, you can borrow what you need and have it on its way in a matter of days. Then you can leisurely make more permanent arrangements and repay the interest-free loan to your IRA.
  • Considerations

    When you prepare your next federal income tax return, you should note the loan in your Form 1040 on line 15. If the loan is repaid to your IRA within 60 days, you should enter "zero" below it. You will have then placed the IRS on notice that you have made, then repaid a loan from your IRA.
  • Potential

    IRAs are a great source of short-term cash that is available to you both interest-free and tax-free, as long as you follow the simple rules. But because the penalties are so severe, many people who know about this find other ways to satisfy their short-term money needs.
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