Can You Actually Borrow Money Against Your IRA?

It is not possible to borrow money directly from an Individual Retirement Account (IRA). Unlike some employer-sponsored retirement plans, such as a 401(k), IRAs are not designed to offer loans to the account holder. Any funds removed from an IRA are classified as a distribution, which can trigger tax implications and penalties. Attempting to access IRA funds outside of standard distribution rules or permitted rollovers leads to unfavorable financial consequences.

IRA Distribution Rules

Withdrawals from a traditional IRA are considered taxable income in the year they are taken. This is because contributions to traditional IRAs are made with pre-tax dollars, and taxes are deferred until distribution. For individuals under age 59½, these distributions are subject to a 10% early withdrawal penalty and ordinary income taxes.

Distributions from Roth IRAs differ. Contributions are made with after-tax dollars, allowing tax-free withdrawals of contributions. However, earnings are subject to taxes and the 10% early withdrawal penalty if withdrawn before age 59½ or if the account has not been open for at least five years. All IRA distributions are reported to the Internal Revenue Service (IRS) on Form 1099-R.

The 60-Day Rollover Rule

While direct loans from an IRA are not permitted, the 60-day rollover rule offers a mechanism for temporary access to funds without immediate tax consequences. This rule allows an individual to withdraw money from an IRA and redeposit it into the same or another eligible retirement account within 60 days. If the funds are redeposited within this timeframe, the transaction is treated as a tax-free rollover, not a taxable distribution.

Missing the 60-day deadline means the withdrawn amount becomes a taxable distribution, subject to ordinary income tax and the 10% early withdrawal penalty if the individual is under age 59½. The IRS imposes a “one-rollover-per-year” rule, meaning an individual can only complete one indirect rollover from any of their IRAs within a 12-month period. This rule applies across all IRAs owned by an individual. Direct trustee-to-trustee transfers, where funds move directly between financial institutions, are not subject to the 60-day or one-per-year rules and are a safer method for moving retirement funds.

Prohibited Transactions with an IRA

Using an IRA as collateral for a personal loan or lending money from it to oneself constitutes a prohibited transaction under IRS rules. These transactions involve improper use of an IRA account or annuity by the owner or a disqualified person. Disqualified persons include the IRA owner, their spouse, ancestors, lineal descendants, and the spouses of lineal descendants.

The consequences of engaging in a prohibited transaction are significant. The IRA loses its tax-deferred status as of the year the transaction occurred. The entire fair market value of the account is considered a taxable distribution. If the owner is under age 59½, this distribution also becomes subject to the 10% early withdrawal penalty. This means the full value of the IRA, not just the amount involved in the prohibited transaction, can become immediately taxable and penalized.

Penalty Exceptions for Early Distributions

While early withdrawals from an IRA incur a 10% penalty, certain circumstances allow penalty-free distributions before age 59½. These exceptions do not exempt the distribution from ordinary income tax, but they waive the penalty. Distributions used for qualified higher education expenses for the IRA owner, their spouse, children, or grandchildren are exempt from the penalty.

An exception applies to first-time home purchases, allowing penalty-free withdrawals of up to $10,000 over a lifetime. Married individuals can each utilize this $10,000 limit from their respective IRAs. Funds used for unreimbursed medical expenses exceeding 7.5% of adjusted gross income are exempt from the penalty.

Individuals can take Substantially Equal Periodic Payments (SEPP) from their IRA without penalty. These payments must be calculated using IRS-approved methods and continue for the longer of five years or until age 59½. Exceptions also include distributions due to total and permanent disability, distributions made to beneficiaries after the IRA owner’s death, and certain distributions for health insurance premiums if unemployed.