Worst Time to Borrow From Your IRA

Borrowing from your IRA isn’t really allowed. There is a loop hole that will let you borrow money from your IRA for very short periods of time. Basically it involves transferring your IRA to another account. When you do this you can use the money for 60 days, so you effectively borrow from your IRA for that time period. Given the current economic situation this type of loan from your IRA maybe a very tempting option. However, there is a significant danger with trying to borrow from your retirement account like this.

The first danger is of course that you won’t be able to pay it back and will get hit with a 10% penalty from the government tax department plus you must pay tax on the amount you take out at your marginal tax rate. This type of loan isn’t really allowed and your ability to borrow money like this is just a side effect of the rules that try to give you a reasonable amount of time to transfer your IRA to another account. However the penalties are a smaller risk than the risk of not riding the market back up.

If your IRA is like most people’s it has lost a significant amount of value in the last 6 months or so. Pulling the money out now and missing the inevitable upswing means locking in those losses. If you don’t get the money reinvested before the market goes back up, you will stand to lose a lot of money. In most cases you’ll lose significantly more than the amount of taxes that would be due on the money.

If you are in debt and can’t find a way out, pulling out your IRA investments should be the absolutely last resort in this market. Make sure you have exhausted all of your other available options before considering such a move.

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