IRA Loan

Can You Borrow From an IRA?

If you’ve already contributed to an IRA but need cash, you may consider a loan from your account. Unfortunately, you can’t actually take out a loan from your IRA. The Internal Revenue Service is very strict on what you can and cannot do with an IRA account. In fact, you can face IRS penalties if you withdraw funds from your IRA before you are of the required age. You can, however, get an IRA Rollover via taking an IRA distribution. An IRA rollover is a way you can get cash from your account while also maintaining your eligibility for tax-free future withdrawals.

Alternatives to IRA Loans

While you can’t get a loan from an IRA, there are other ways that you can access your retirement funds early.

IRA Rollover

You can take advantage of the IRA rollover and pay back the money within 60 days. This allows you to take out cash without penalty. Here, you may take a distribution from the account and then put it into another retirement deal. For instance, you can place the money in an IRA annuity or take it in a lump sum payment. This gives you access to cash but also allows your money to continue earning interest or growing within an account.

Retirement Loans

You may also get a loan through your 401(k) plan. The rules that apply here are generally more flexible than an IRA account. For example, many retirement plans allow you to borrow up to 50 percent of the account balance. However, some plans have a waiting period before you can take funds from the account. In some cases, if you leave your service company, you may have to repay early withdrawal penalties.

IRA Hardship Withdrawal

If you face financial hardship, you may be able to withdraw funds from your IRA. If your need is due to an immediate and heavy financial need, you can take out up to $10,000 without penalty. You will then have to pay taxes on the money as if it were ordinary income and also pay a 10% early withdrawal penalty unless you are over age 59½.

Roth IRA Withdrawals

You can also take out your contributions from a Roth IRA without penalty. This is the case even if you have already withdrawn earnings or converted money into a Roth IRA. However, if your withdrawal causes the account to fall below the minimum balance for six months straight, you may face an IRS fine.

When Should You Use Alternative Loans?

If you need an immediate cash infusion and you’re still within the 5-year period for a traditional IRA, then consider doing a rollover. This is especially true if you only really need the money temporarily. When you do this, it preserves your funds so that you can withdraw them tax-free after retirement. On the other hand, if you don’t want to wait until retirement to withdraw funds, then consider getting a 401(k) or IRA hardship withdrawal. Make sure that you repay the money so that your account continues growing tax-free.

Drawbacks of IRA Withdrawals

If you need cash from your IRA, you do have options. However, as with most retirement plans, early withdrawals come with penalties and risks. For instance: Early withdrawal penalties can eat into your principal. You may miss out on future earnings if you take a distribution now. Future earnings will be taxed as they grow within the account. If you withdraw funds and fail to pay the taxes and penalties, you will face an IRS penalty. This can be as high as 50 percent of the value of your IRA distribution due to early withdrawal. This is in addition to any other fees or taxes you need to pay. Another disadvantage is that you’ll need to pay back the money sooner. In some cases, if you withdraw a large sum of money, you may have to repay within five years or face a 10 percent early withdrawal penalty each year.

Final Thoughts

When you take money out of your IRA or any other retirement plan, you will face taxes and penalties. However, if you do need the money and your only source is your IRA account, then understand what you can withdraw without penalty and when. Having a full understanding of the rules as well as speaking with a financial advisor is essential . This is especially true if you think that you may need IRA loan alternatives due to financial hardship. Knowing your retirement account withdrawal options early on can help you avoid the stress of having to pay back an IRA distribution without penalty.

Unfortunately, you cannot. You also cannot move assets from one IRA to another or take out a loan against the principal you have already paid for in full. What you can do is pay back your current income tax obligation on contributions, but not the growth accrued on the investment itself.
There are alternatives to IRA loans, which include IRA rollover, 401(k) plans, Roth IRA and hardship withdrawals.
If you need a long-term solution, then consider doing a rollover. This is especially true if you only really need the money temporarily. When you do this, it preserves your funds so that you can withdraw them tax-free after retirement. On the other hand, if you don’t want to wait until retirement to withdraw funds, then consider getting a 401(k) or IRA hardship withdrawal. Make sure that you repay the money so that your account continues growing tax-free.
The drawbacks include penalties and future earnings taxation as the money continues to grow tax-free inside your IRA account.
The best way to find out more is by consulting with a Certified Public Accountant (CPA) or financial advisor. They can help you determine the best course of action for your situation. They will review your unique needs and offer advice on whether an IRA loan or withdrawal is right for you.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.