Can You Borrow From Your IRA? Rules to Know

Unlike some employer-sponsored retirement plans, you cannot take a loan from an Individual Retirement Arrangement (IRA). The Internal Revenue Service (IRS) establishes the regulations for these accounts, and its rules are designed to preserve the funds for retirement. The prohibition on IRA loans applies to all types, including Traditional, Roth, SEP, and SIMPLE IRAs. This structure ensures the account’s primary purpose remains long-term savings.

The 60-Day Rollover Rule

There is a mechanism that allows for short-term access to your IRA funds, known as the 60-day rollover rule. This process involves taking a distribution from your IRA and then redepositing the full amount back into the same or another IRA within a strict 60-day window. If this deadline is met, the transaction is not considered a taxable event, and no penalty is assessed, effectively allowing you to use the money for 60 days without cost.

The 60-day clock starts from the moment you receive the funds from your IRA custodian. You are limited to one such indirect rollover per 12-month period. This limitation applies to all of your IRAs in aggregate, not one per account, and it is a rolling 12-month period, not a calendar year.

Failing to redeposit the entire distribution within the 60-day timeframe has consequences. The amount not returned is treated as a permanent withdrawal, subject to both income tax and potential penalties. If your IRA custodian withholds taxes from the initial distribution, you must use personal funds to make up that difference when completing the rollover to avoid having the withheld portion treated as a taxable distribution.

Tax Consequences of IRA Withdrawals

When you withdraw funds from a Traditional IRA and do not roll them over, the entire amount is added to your gross income for that tax year. This means the withdrawal is taxed at your ordinary income tax rate. The financial institution holding your IRA will report this distribution to you and the IRS on Form 1099-R.

For individuals under the age of 59 ½, early distributions are subject to a 10% additional tax, often called an early withdrawal penalty. It is a separate tax calculated on the taxable portion of the withdrawal and is reported on Form 5329, which is filed with your annual tax return.

For example, a $20,000 withdrawal by someone in a 22% federal tax bracket who is under 59 ½ would result in $4,400 in federal income tax and a $2,000 penalty, not including any applicable state taxes.

Exceptions to the Early Withdrawal Penalty

The IRS provides several exceptions that allow you to avoid the 10% early withdrawal penalty, though the distribution is still subject to ordinary income tax. One of the most common is for a first-time home purchase, which allows for a penalty-free withdrawal of up to a $10,000 lifetime limit. The funds must be used for qualified acquisition costs within 120 days of the withdrawal.

Another exception is for qualified higher education expenses for yourself, your spouse, children, or grandchildren. There is no specific dollar limit, but the funds must be used for tuition, fees, books, and other required supplies at an eligible educational institution. Withdrawals can also be made penalty-free to cover medical expenses that exceed 7.5% of your adjusted gross income (AGI) or to pay for health insurance premiums while you are unemployed.

Other exceptions include distributions taken due to a total and permanent disability, distributions made to a beneficiary after the IRA owner’s death, and certain distributions for qualified births or adoptions of up to $5,000. Penalty-free withdrawals are also available for victims of domestic abuse, allowing for a withdrawal of up to the lesser of $10,000 or 50% of the account balance. For unforeseeable or immediate financial needs, one distribution of up to $1,000 per year can be taken for personal or family emergency expenses.

Alternatives for Accessing Funds

A loan from a 401(k) plan is a permissible option for those who have access to one. Plan rules permitting, you can borrow up to 50% of your vested account balance, capped at a maximum of $50,000, and repay it with interest over a period of up to five years.

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against the equity in their property. Personal loans from banks or credit unions are another common alternative, providing a lump sum of cash that is repaid in fixed installments, though interest rates can vary based on creditworthiness.