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Borrow from IRA


The IRS rules say you cannot borrow from your IRA. But can you? Are there loopholes? There is a way to borrow from your IRA. It isn’t that the IRS wants you to borrow from your IRA. They have made it clear that this is against the rules. However, the rules that allow you to move your IRA from one investment company to another dude give you the ability to create a short-term loan.

You can withdraw money from your IRA and close it out. Once you do this you have 60 days to put it into a nether IRA account. During those 60 days you basically have a 60 day loan of the funds from your IRA. If you don’t get it back into an individual retirement account within the 60 day period you will owe taxes and an additional 10% penalty.

This is a risky strategy. When you borrow from your IRA you are running the risk of what could be significant expense in the form of taxes and penalties. A new IRA will generally take a few days to set up so you can’t wait until day 59 to start getting the new account ready. If you want to borrow money out of your IRA in this manner make sure you know exactly how long it will take to get a new account set up and give yourself some time as a cushion just to be on the safe side.

There is not a way to borrow against your IRA. In other words you can’t use the value of your IRA as collateral for a loan. This means you also can’t enable margin on an IRA brokerage account. Margin is basically the ability to borrow against your existing investments which is not allowed in IRA accounts. While you might be able to find an individual willing to loan you money by putting your IRA up as a pledge, this type of arrangement would technically void your IRA account. Which means taxes and a 10% penalty would be due immediately.

With regards to the 60 day loan by borrowing money from your IRA, the IRS is starting to be very careful about enforcing the 60 day rule. In the past they would often let things slide if someone established the IRA on day 61. That doesn’t seem to be the case anymore. The IRS realizes that people are closing and opening IRA accounts in order to get around the no borrowing rule. They haven’t closed the loophole. You can still borrow from your IRA for 60 days. But they are being much more careful to make sure everyone follows the rules.

The IRS still seems to give some leeway if the purpose of the IRA transfer was not to create a 60 day loan. But they are starting to look more closely at the reason behind the transaction before allowing any type of grace.

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