Can I Borrow From My IRA and Pay It Back?

While Individual Retirement Arrangements (IRAs) do not permit loans like a 401(k) plan, a tax code provision offers a way to access funds for a short period. This method, an indirect rollover, lets you withdraw money from your IRA and redeposit it without tax consequences if you follow strict guidelines. The process is governed by the 60-day rollover rule, which functions like a short-term, interest-free loan. Following the requirements is necessary to avoid tax penalties.

The 60-Day Rollover Rule Explained

In an indirect rollover, you take a distribution from an IRA that is paid directly to you. To avoid taxes on the distribution, you must redeposit the full amount into an eligible retirement account within 60 days. This deadline starts the day after you receive the funds.

A limitation is the one-rollover-per-year rule, which allows only one IRA-to-IRA indirect rollover within any 12-month period. This 365-day period begins when you receive the distribution. The limitation applies to all of your IRAs combined, including Traditional, Roth, SEP, and SIMPLE IRAs. For example, if you take a distribution from a Traditional IRA on March 1st and roll it over, you cannot perform another indirect rollover from any of your other IRAs until March 2nd of the following year.

A violation of this rule makes the second distribution a taxable event. This restriction does not apply to direct trustee-to-trustee transfers, where money moves between institutions without you taking possession. Conversions from a Traditional IRA to a Roth IRA are also exempt.

Executing an Indirect Rollover

First, contact your IRA custodian to request a distribution, specifying you will take personal receipt of the funds. The custodian will then issue the funds. While 401(k) distributions have mandatory 20% tax withholding, IRA withholding is optional, with a default rate of 10%. If taxes are withheld, you must use personal funds to make up the difference to roll over the full gross amount.

The final step is to deposit the funds into another IRA. To complete a tax-free rollover, the exact gross amount withdrawn must be deposited within the 60-day window. You will receive IRS Form 1099-R from the distributing institution and Form 5498 from the receiving institution for your tax return.

Tax Implications of a Failed Rollover

If you fail to redeposit funds within the 60-day deadline, the withdrawal becomes a taxable distribution. The full amount is added to your ordinary income for that tax year and is taxed at your marginal rate, which could push you into a higher tax bracket.

For those under age 59½, the IRS also imposes a 10% early withdrawal penalty on the taxable portion of the distribution. Another consequence is the loss of tax-deferred growth potential, as the funds are no longer in a retirement account.

For example, an individual under age 59½ in the 22% federal tax bracket withdraws $20,000 from their Traditional IRA and fails the rollover. They would owe $4,400 in income tax and a $2,000 early withdrawal penalty. The total immediate cost would be $6,400, not including state taxes.

Waiver of the 60-Day Rollover Requirement

The IRS provides limited relief for failing to meet the 60-day deadline, but only under specific circumstances beyond the taxpayer’s control. The two methods for seeking a waiver are self-certification and requesting a private letter ruling (PLR).

To use self-certification, the failure must be due to one of several specific reasons:

• Errors made by the financial institution
• A misplaced and uncashed distribution check
• The death or severe illness of a family member
• Severe damage to your principal residence

If you meet a condition, you submit a letter to the receiving financial institution certifying the failure was not your fault. The institution can then accept the late rollover, though the IRS can still review and deny it.

For situations not covered by self-certification, the other option is to request a Private Letter Ruling (PLR) from the IRS. This is a formal process where you petition the IRS for a waiver. The user fee for a PLR is often $10,000 or more, making it an impractical choice for most.