Can I Get a Loan Against My IRA?

An Individual Retirement Arrangement (IRA) serves as a tax-advantaged savings vehicle designed to help individuals accumulate funds for retirement. These accounts offer specific benefits, such as tax-deferred growth or tax-free withdrawals in retirement, depending on the IRA type. Many individuals consider their personal savings, including retirement funds, when facing immediate financial needs. This often leads to questions about accessing IRA funds, particularly whether one can take a loan from their IRA. This article clarifies the rules and implications surrounding such actions.

The General Rule: No IRA Loans

Direct loans from an IRA are generally not permitted under Internal Revenue Service (IRS) regulations. The IRS prohibits specific actions, known as “prohibited transactions,” to maintain the integrity of IRAs as retirement savings vehicles. These rules prevent individuals from using retirement funds for current personal benefit without proper tax implications, preserving the account’s long-term retirement savings nature.

Prohibited transactions include self-dealing, which involves an IRA owner using the account for personal gain, such as borrowing money directly from the IRA or using the IRA as collateral for a personal loan. If an IRA owner attempts to take what they perceive as a “loan” from their IRA, the IRS typically recharacterizes this transaction. This recharacterization means the amount involved is treated as a taxable distribution from the IRA, triggering significant consequences.

What Happens if You Take an IRA “Loan”?

If an IRA owner engages in a prohibited transaction, such as attempting to take a loan or using the IRA as collateral, the entire amount involved is considered a taxable distribution from the IRA. This deemed distribution is effective as of the first day of the tax year in which the prohibited transaction occurred.

The distributed amount is generally subject to ordinary income tax rates. If the IRA owner is under age 59½ at the time of the transaction, the distribution is also subject to an additional 10% early withdrawal penalty. This penalty applies unless a specific exception is met. Engaging in a prohibited transaction can cause the entire IRA to lose its tax-exempt status, meaning the fair market value of the entire account is considered distributed as of the beginning of that tax year, potentially leading to a much larger taxable event than just the “loan” amount.

Comparing IRAs to 401(k)s

While Individual Retirement Arrangements (IRAs) generally do not permit loans, employer-sponsored retirement plans like 401(k)s can offer loan provisions. The availability of 401(k) loans is at the discretion of the plan administrator, not all plans offer this feature. When available, 401(k) loans allow participants to borrow against their vested account balance.

The maximum amount a participant may borrow from a 401(k) plan is generally the lesser of 50% of their vested account balance or $50,000. An exception allows borrowing up to $10,000 if 50% of the vested balance is less than that amount. These loans typically require repayment within five years, though a longer period, such as up to 15 years, may be allowed if the loan is used to purchase a primary residence. Repayments are usually made through regular, often quarterly, installments, frequently via payroll deductions. The interest paid on a 401(k) loan is credited back to the participant’s own account.

Other Ways to Access IRA Funds

Although direct loans from an IRA are not allowed, there are specific circumstances under which IRA funds can be legitimately accessed. These methods involve distributions (withdrawals) and may, in certain cases, avoid the additional 10% early withdrawal penalty that typically applies to distributions taken before age 59½. Even if the 10% penalty is waived, the withdrawn amount is generally still subject to ordinary income tax, unless it’s a qualified distribution from a Roth IRA.

Several common exceptions allow for penalty-free early withdrawals:

• After the IRA owner reaches age 59½.
• In the event of the IRA owner’s death or total and permanent disability.
• Through Substantially Equal Periodic Payments (SEPPs), also known as 72(t) distributions, which require regular withdrawals based on life expectancy.
• For qualified unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
• For qualified higher education expenses.
• Up to $10,000 for a first-time home purchase.
• Up to $5,000 per parent, per child, for qualified birth or adoption expenses.
• For qualified reservist distributions, made by members of a reserve component called to active duty.

Another method of temporarily accessing IRA funds without it being a permanent distribution is through the 60-day rollover rule. This rule allows an individual to withdraw funds from an IRA and redeposit them into the same or another qualified retirement account within 60 days to avoid taxation and penalties. However, this is not a loan and requires full repayment within the strict timeframe. The IRS limits these indirect IRA-to-IRA rollovers to one per 12-month period across all IRAs owned.