Can You Borrow Money From Your IRA Account?

Individual Retirement Arrangements (IRAs) serve as a tool for long-term retirement savings, offering tax advantages to encourage saving for the future. The primary purpose of an IRA is to accumulate assets, growing them tax-deferred or tax-free, depending on the IRA type. While some wonder if they can “borrow” from an IRA like an employer-sponsored plan, IRAs do not permit traditional loans. Any access to funds is generally categorized as a “distribution” or “withdrawal,” not a loan.

Understanding IRA Withdrawals Versus Loans

A direct loan from an Individual Retirement Arrangement is not permissible. This contrasts with employer-sponsored plans, such as 401(k)s, which often allow participants to borrow against their vested account balance. The key distinction is that an IRA is a personal retirement savings vehicle, whereas a 401(k) is a workplace plan structured with specific loan features. If funds are taken from an IRA, they are treated as a “withdrawal” or “distribution.”

When money is removed from an IRA, it is considered a taxable event. Unlike a loan that requires repayment with interest, an IRA distribution is a permanent removal of funds from the retirement account. The amount withdrawn is generally added to the individual’s gross income for the tax year. While direct loans are prohibited, there are limited circumstances where funds can be accessed from an IRA. These mechanisms are not equivalent to a loan and come with strict rules and potential financial repercussions.

The 60-Day Rollover Rule

The 60-day rollover rule represents the closest mechanism to a temporary “loan” from an IRA, though it functions as a distribution followed by a redeposit. Under this rule, an individual can withdraw funds from an IRA and has 60 calendar days to deposit those funds into another eligible retirement account, such as another IRA or an employer-sponsored plan like a 401(k), to avoid immediate taxation and penalties. This process is known as an indirect rollover. If the funds are successfully redeposited within the 60-day window, the distribution is not considered taxable income, and no early withdrawal penalty applies.

However, limitations govern this type of transaction. An individual is permitted to perform only one 60-day rollover from any of their IRAs within a 12-month period. This rule applies across all IRAs an individual owns, not per individual IRA account. For example, if a 60-day rollover is completed in January, another such rollover cannot be initiated until the following January, regardless of whether different IRA accounts are involved.

Failing to redeposit the funds within the 60-day timeframe carries significant consequences. The entire amount withdrawn becomes a taxable distribution, subject to ordinary income tax rates for the year of the withdrawal. Additionally, if the individual is under age 59½, a 10% early withdrawal penalty will generally be assessed on the distributed amount, in addition to the income tax. This makes the 60-day rollover a high-risk option if the individual is not certain they can meet the repayment deadline.

Accessing Funds Without Penalty

While direct loans are not available, specific exceptions allow individuals to withdraw funds from an IRA before age 59½ without incurring the typical 10% early withdrawal penalty. These are permanent withdrawals, and while the penalty is waived, the distributed funds are still generally subject to ordinary income tax. These exceptions are distinct from the 60-day rollover and do not require the funds to be redeposited.

Penalty-free withdrawals may be allowed for:

• A first-time home purchase, where up to $10,000 can be withdrawn over a lifetime. Funds must be used within 120 days.
• Unreimbursed medical expenses exceeding a certain percentage of adjusted gross income.
• Qualified higher education expenses for the IRA owner, their spouse, children, or grandchildren.
• Distributions due to the IRA owner’s total and permanent disability.
• Payments received as part of a series of substantially equal periodic payments (SEPP) based on life expectancy.
• Up to $5,000 for qualified birth or adoption expenses per child.
• Certain distributions used to pay health insurance premiums while unemployed, provided specific conditions are met.

Tax Implications of IRA Distributions

Any distribution from a traditional IRA, even if it qualifies for a penalty exception, is treated as ordinary income in the year it is received. The withdrawn amount is added to the individual’s other taxable income and taxed at their marginal rate. This applies to both deductible contributions and accumulated tax-deferred earnings.

For distributions taken before age 59½ that do not meet a specific exception, a 10% early withdrawal penalty is imposed. This penalty is an additional tax on the distributed amount, on top of the regular income tax owed. For example, withdrawing $10,000 from a traditional IRA before age 59½ without an applicable exception would incur income tax on the $10,000 plus an additional $1,000 penalty.

Roth IRA distributions follow different tax rules. Contributions are made with after-tax dollars, so they can generally be withdrawn at any time without tax or penalties. Qualified distributions of earnings from a Roth IRA are also tax-free and penalty-free, provided the account has been open for at least five years and the account holder is age 59½ or older, disabled, or using funds for a first-time home purchase (up to $10,000). Non-qualified Roth IRA distributions may be subject to income tax on the earnings portion and the 10% early withdrawal penalty. Understanding these tax consequences is important before taking any IRA distribution.