Can I Borrow From My Traditional IRA?

A Traditional Individual Retirement Account (IRA) offers a tax-advantaged way to save for retirement, with contributions often tax-deductible and earnings growing tax-deferred. Many consider their IRA a potential source of funds for immediate needs, leading to questions about “borrowing” from it. However, an IRA is not structured like a bank where you can take a loan.

Accessing Funds from a Traditional IRA

Funds held within a Traditional IRA cannot be “borrowed” in the conventional sense; you cannot take a loan against your IRA balance with a set repayment plan. Instead, any money removed from a Traditional IRA is considered a “distribution” or “withdrawal.” Distributions are subject to specific tax rules and potential penalties, unlike a loan. The rules are designed to encourage the IRA’s purpose as long-term retirement savings.

General Tax Rules for Withdrawals

Withdrawals from a Traditional IRA are subject to ordinary income tax in the year they are taken. This is because contributions are often made with pre-tax dollars, and earnings grow tax-deferred. In addition to income tax, distributions taken before age 59½ incur a 10% additional early withdrawal penalty. This penalty discourages early access to retirement savings, reinforcing the account’s purpose as a long-term investment vehicle.

Specific Penalty Exceptions

While the 10% early withdrawal penalty applies to distributions before age 59½, several exceptions exist where this penalty is waived, though income tax on the distribution still applies:

• Qualified higher education expenses for yourself, spouse, children, or grandchildren.
• Up to $10,000 for a first-time home purchase (no primary residence owned in past two years).
• Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI).
• Total and permanent disability.
• Substantially equal periodic payments (SEPP) based on life expectancy.
• Withdrawals by beneficiaries after the IRA owner’s death.
• Certain health insurance premiums if you received unemployment compensation for at least 12 consecutive weeks.
• Qualified birth or adoption expenses, up to $5,000 per child.
• Military reservists called to active duty for more than 179 days, during their active duty period.

The 60-Day Rollover Option

The 60-day rollover option provides a mechanism that can feel similar to borrowing, though it is fundamentally a temporary transfer. An individual can take a distribution from their Traditional IRA and then deposit the funds into another eligible retirement account or back into the same IRA within 60 days. If the funds are redeposited within this timeframe, the distribution is not considered taxable income and no penalties apply. This process is sometimes used for short-term liquidity needs because it allows temporary access to funds without immediate tax consequences, provided the full amount is returned.

However, this “indirect” rollover is subject to a “one-per-year” limitation; you can only perform one rollover across all your IRAs within any 12-month period. Trustee-to-trustee transfers, where funds move directly between financial institutions without the IRA owner taking possession, are not subject to this once-per-year rule and offer a safer alternative for moving funds.