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Can You Borrow Against an IRA?


Many people who find themselves strapped for cash start considering their individual retirement account as a possible source of funds. With 401Ks and 403Bs you can sometimes borrow the money from yourself and pay it back over time so many people assume you can borrow from an IRA as well. Obviously borrowing from your 401k can be a great way to do a do-it-yourself debt consolidation loan because you are essentially borrowing money from yourself, but what about people who have their money in an IRA.

Can I Borrow from My IRA?

The short answer is “no”. The government has decided that it isn’t legal to borrow from your IRA like you can do borrow from a 401k or 403b.   The longer answer is “yes using some loop holes”.   There are other transactions that the IRS allows that will effectively give you a temporary loan from your IRA.   It isn’t officially borrowing money from your IRA, but the net effect is the same.

While you can’t borrow against your IRA, you are allowed to move it to another account. Often this means getting a check from one account and then opening another. When this happens you have a period of time after the money is withdrawn before it is required to be put in the other account. At one point this period of time was 60 days and as far as I know it still is 60 days. You can basically give yourself a 60 interest free loan. So by doing that, you can borrow money from an IRA.

The IRS only allows you to do this once for each account in any 12 month period. However if you have several different IRA accounts with substantial savings you could give yourself a rolling loan 60 days at a time.

Can I get a loan against my IRA?

This would be a situation where a bank looks at the value of your IRA and then gives you a loan using that value as collateral.  The IRS doesn’t allow this because the bank can’t seize the loan if you don’t pay your debt back.  There may be a way to get a loan against your IRA as using the account value as collateral by borrowing on margin.  This isn’t allowed by the rules, but some brokers may be lax in how they have their accounts setup.  This is not at all recommended. (Normally margins are a device that allows you to reinvest your money into other investments, but in some cases you may be able to actually withdraw the money from the account.)

What if I don’t pay back an IRA?

Well assuming that it was a traditional individual retirement account, you would owe taxes on that money plus a 10% penalty. These fees are significant and that is why most people recommend that you never try to borrow from your IRA. However, it is a Roth, then you can withdraw your original investment penalty free (you’ve already paid taxes on the principle).

Are there any other ways to get money out of an IRA?

Keep in mind, you can always take money out.   The government doesn’t do anything to prevent you from getting a distribution from your account.   They simply tax you to help discourage any premature withdrawals. You’ll just have to pay taxes and a penalty. In some cases you won’t have to pay a penalty if the money is considered to be a withdrawal for “hardship”.

Hardship Withdrawals

The IRS allows you to take money out to deal with emergency situations liked large medical expenses.   There are also certain circumstances where educational benefits and for buying your first home will give you a way to withdraw money without a penalty.

Keep in mind that with a regular individual retirement account, you will still owe taxes on the money. If you didn’t pay taxes when you put the money into an IRA, you’ll have to pay them when you take the distribution.   However, if you are withdrawing for an emergency, chances are your economic situation will put you in a favorable tax bracket.

Roth IRAs

Roth IRAs are different.  With a Roth, you pay taxes on the money before you invest it.  Then it grows tax free.  You can take out the money you originally put in without paying any type of tax penalty.  For most people, this would be a better place to get money than a traditional IRA.  You can take the money out and you don’t have to put it back.  You don’t have to borrow from a Roth IRA because there is no need to pay the money back.  Do be aware that taking out the original investment, especially early on may really hurt your retirement accounts ability to grow over the years.  Still, this could be a good potential source of funds and something that should be considered if you are at the point you are looking for ways to get money out of a traditional IRA for some reason.

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