Can I Borrow Money From My IRA?

An Individual Retirement Arrangement (IRA) is a personal savings vehicle offering tax advantages for retirement. Direct “loans” from an IRA are generally not permitted by the Internal Revenue Service (IRS). Funds are accessed through “withdrawals” or “distributions,” which operate under specific regulations.

Distinguishing IRA Access from 401(k) Loans

Many 401(k) plans offer loans against vested account balances. These loans must be repaid with interest, which returns to the participant’s account. This allows temporary, non-taxable access if loan terms are met.

IRAs (traditional, Roth, SEP, SIMPLE) lack a loan feature. The IRS prohibits direct borrowing from any IRA. This distinction arises because IRAs are individual accounts, unlike employer-sponsored 401(k)s. Money taken from an IRA is a distribution, not a loan, treated as a payout rather than a temporary advance.

Rules for Taking IRA Withdrawals

To avoid an additional tax penalty, distributions are generally taken after age 59½. At this age, traditional IRA withdrawals are qualified distributions, taxed as ordinary income without penalty.

Funds can be withdrawn at any age. Distributions before age 59½ are “early” withdrawals. These early withdrawals incur additional taxes and penalties.

There is no requirement to demonstrate a hardship to take a distribution from an IRA. The primary consideration for any withdrawal is whether it is a qualified or early distribution, as this determines tax treatment and potential penalties.

Tax Consequences of IRA Withdrawals

Taking money out of an Individual Retirement Arrangement carries specific tax consequences, varying by IRA type and account holder’s age. For traditional IRAs, withdrawals are taxed as ordinary income in the year received. The amount withdrawn is added to gross income and taxed at the marginal income tax rate, as contributions are often pre-tax or tax-deductible.

Distributions from a traditional IRA taken before age 59½ are subject to a 10% early withdrawal penalty. This penalty applies to the taxable portion of the distribution. For example, a $10,000 early withdrawal, if fully taxable, would incur an additional $1,000 penalty on top of regular income tax.

Roth IRAs operate under different tax rules for withdrawals. Contributions are made with after-tax dollars, so they are not tax-deductible. Qualified distributions from a Roth IRA are entirely tax-free and penalty-free.

For a Roth IRA distribution to be qualified, two conditions must be met: the account holder must be at least 59½ years old, and five years must have passed since the first contribution to any Roth IRA. If these conditions are not met, only the earnings portion of a non-qualified Roth IRA distribution may be subject to income tax and the 10% early withdrawal penalty, while original contributions can be withdrawn tax-free.

Circumstances Avoiding Early Withdrawal Penalties

Early withdrawals from an Individual Retirement Arrangement incur a 10% penalty. However, specific exceptions allow penalty-free access to funds before age 59½. Even with these exceptions, the distribution may still be subject to ordinary income tax.

Specific exceptions to the early withdrawal penalty include:

• Qualified higher education expenses, including tuition, fees, books, supplies, and equipment for the account holder, spouse, child, or grandchild.
• Distributions for a first home purchase, allowing up to $10,000 penalty-free over a lifetime. The individual must not have owned a home in the two-year period ending on the purchase date.
• Substantially equal periodic payments (SEPP), also known as 72(t) payments, which provide penalty-free distributions based on life expectancy. These payments must continue for at least five years or until age 59½, whichever is longer.
• Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
• Distributions due to the account holder’s total and permanent disability.
• Distributions made to a beneficiary after the IRA owner’s death, though they may be taxable.
• A qualified birth or adoption, permitting a penalty-free withdrawal of up to $5,000 per parent.