Can You Borrow From an IRA? Rules for Accessing Funds

An Individual Retirement Arrangement (IRA) serves as a personal savings plan offering tax advantages for retirement. While designed for long-term growth, the common notion of “borrowing” directly from it, similar to a 401(k) loan, does not apply. Any money taken from an IRA is considered a distribution, subject to specific rules and potential tax implications.

General Rules for Accessing IRA Funds

Unlike some employer-sponsored retirement plans, an IRA does not permit direct loans. Any funds removed are classified as distributions, which can carry significant tax consequences and additional penalties. This means you cannot simply “borrow” from your IRA and repay it later without adhering to Internal Revenue Service (IRS) guidelines.

The primary rule for accessing IRA funds without an early withdrawal penalty is reaching age 59½. Distributions taken on or after this age are considered qualified, meaning they are not subject to the 10% early withdrawal penalty. However, these distributions are still typically subject to ordinary income tax, depending on the IRA type and whether contributions were tax-deductible.

If you take a distribution from your IRA before age 59½, the amount withdrawn is generally subject to your ordinary income tax rate. In addition to regular income tax, an extra 10% early withdrawal penalty usually applies to the taxable portion. This penalty discourages early access to retirement savings. However, specific exceptions allow for early access without penalty.

Specific Penalty-Free Withdrawals

Several situations allow penalty-free distributions from an IRA before age 59½. One exception is for unreimbursed medical expenses exceeding a certain percentage of your adjusted gross income, typically 7.5%. The penalty-free amount cannot exceed these qualified medical expenses. This provision helps individuals facing significant healthcare costs access their retirement savings without further financial burden from penalties.

Another exception covers distributions used for qualified higher education expenses for yourself, your spouse, children, or grandchildren. These expenses include tuition, fees, books, supplies, and equipment for enrollment or attendance at an eligible educational institution. Room and board also qualify if the student is enrolled at least half-time. This allows families to utilize IRA funds to support educational pursuits without facing a penalty.

First-time homebuyers can access IRA funds penalty-free for a down payment or acquisition costs, up to a lifetime limit of $10,000. To qualify, the distribution must be used within 120 days to buy, build, or rebuild a first home for the account holder or a qualified family member. The individual must not have owned a home during the two-year period ending on the date of acquisition. This specific allowance supports homeownership by providing a penalty-free avenue to access retirement savings.

If you become totally and permanently disabled, distributions from your IRA are exempt from the 10% early withdrawal penalty. This exception requires physician certification that you cannot engage in substantial gainful activity due to a physical or mental condition. Distributions made to a beneficiary or estate after the IRA owner’s death are also penalty-free, regardless of the beneficiary’s age. These provisions acknowledge life-altering circumstances and provide flexibility for accessing funds.

Distributions taken as part of a series of substantially equal periodic payments (SEPPs) are exempt from the early withdrawal penalty. These payments must be calculated using IRS-approved methods based on your life expectancy or the joint life expectancy of you and your beneficiary. Once started, these payments generally must continue for at least five years or until you reach age 59½, whichever is later. This exception allows for structured early retirement income without penalty.

Indirect Temporary Fund Access

While direct loans from an IRA are not permitted, a specific IRS rule allows for temporary, indirect access to funds known as the 60-day indirect rollover. This rule permits an IRA owner to withdraw funds from their account and redeposit them into the same or another IRA, or another qualified retirement plan, within 60 days. If redeposited within this strict timeframe, the transaction is treated as a rollover, and the distribution is not taxable or subject to penalties.

It is crucial to understand that this 60-day period is absolute. Failing to redeposit the funds within this window results in the entire withdrawal being considered a taxable distribution. This means it would be subject to ordinary income tax and, if you are under age 59½, the additional 10% early withdrawal penalty. The indirect rollover serves as a temporary bridge, allowing access to funds for a short period, rather than a permanent withdrawal.

A significant limitation of the 60-day indirect rollover rule is the “one-rollover-per-year” rule. You can only perform one indirect rollover from all your IRAs combined within any 12-month period. This limitation applies across all IRAs you own, regardless of how many individual IRA accounts you have. This restriction helps prevent individuals from using the 60-day rule as a continuous short-term loan facility.

Taxation of IRA Distributions

The tax treatment of IRA distributions varies significantly depending on whether the account is a Traditional IRA or a Roth IRA. For Traditional IRAs, distributions are generally taxed as ordinary income in the year received. If all contributions were tax-deductible, the entire distribution amount is taxable. This means funds are taxed at your marginal income tax rate, which can range from 10% to 37% or higher, depending on your income level.

If you made non-deductible contributions to a Traditional IRA, a portion of each distribution is considered a tax-free return of your after-tax contributions. The taxable portion is determined by a pro-rata calculation, based on the ratio of your total non-deductible contributions to the total value of all your Traditional IRAs. The IRS Form 8606 is used to track non-deductible contributions and calculate the tax-free and taxable portions of distributions.

In contrast, qualified distributions from a Roth IRA are entirely tax-free and penalty-free. A distribution is qualified if made after a five-year waiting period, which begins on January 1 of the year you first contributed to any Roth IRA. Additionally, one of these conditions must be met: you are age 59½ or older, disabled, or the distribution is made to a beneficiary after your death. Meeting these criteria means the growth and original contributions are never taxed.

If a Roth IRA distribution is not qualified, the “ordering rules” determine which portion is taxable. The first money withdrawn is a return of your regular contributions, which are always tax-free and penalty-free. After all regular contributions are withdrawn, distributions are considered to come from conversion amounts, which are also tax-free but may be subject to a penalty if withdrawn within five years of conversion. Only after contributions and conversions are fully withdrawn are earnings considered distributed. These earnings are taxable and potentially subject to the 10% early withdrawal penalty if the distribution is not qualified.