Can You Take a Loan Against an IRA Account?

Individual Retirement Arrangements (IRAs) serve as a common vehicle for individuals saving for retirement, offering tax advantages that encourage long-term growth. Understanding how funds can be accessed from these accounts, particularly regarding “loans,” and navigating withdrawal rules is crucial to avoid tax implications and penalties.

Can You Take a Loan from an IRA?

Direct loans from any type of IRA, including Traditional, Roth, SEP, and SIMPLE IRAs, are not permitted under Internal Revenue Service (IRS) regulations. The IRS views any attempt to borrow from an IRA as a “prohibited transaction” under Internal Revenue Code Section 4975. This rule is in place to protect the tax-advantaged status of retirement savings and prevent self-dealing.

Engaging in a prohibited transaction carries serious consequences. The entire amount involved in the transaction is considered a taxable distribution from the IRA, effective as of January 1 of the year the transaction occurred.

If the account holder is under age 59½ at the time of the prohibited transaction, an additional 10% early withdrawal penalty applies to the deemed distribution. The IRS treats this event as a full withdrawal of funds, rather than a repayable loan, leading to substantial tax liabilities.

Understanding IRA Distributions

While direct loans are not allowed, funds can legitimately be accessed from an IRA through distributions. An IRA distribution is simply a withdrawal of money from the account. These distributions are categorized as either “qualified” or “non-qualified,” which determines their tax treatment.

For Traditional IRAs, distributions are taxable income. If a distribution is taken before the account holder reaches age 59½, it is deemed a non-qualified distribution and is subject to a 10% early withdrawal penalty. However, Roth IRA distributions work differently; qualified distributions, which occur after age 59½ and after the account has been open for at least five years, are entirely tax-free. Contributions to a Roth IRA can always be withdrawn tax-free and penalty-free at any time, regardless of age or how long the account has been established.

The IRS provides several exceptions to the 10% early withdrawal penalty for non-qualified distributions, though the distributions may still be taxable. Common penalty exceptions include:
Withdrawals made due to the account holder’s death or total and permanent disability.
Up to $10,000 for a first-time home purchase.
Qualified higher education expenses.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Distributions received as part of a series of substantially equal periodic payments (SEPP).
Qualified birth or adoption expenses, up to $5,000 per child.

The 60-Day Rollover Rule

The 60-day rollover rule offers a specific, temporary mechanism for moving IRA funds without incurring immediate taxes or penalties, though it is often misunderstood as a loan. This rule permits an indirect rollover, where funds are withdrawn directly by the account holder and then re-deposited into another qualified retirement account, such as a different IRA or an employer-sponsored plan like a 401(k), within 60 calendar days. If the rollover is completed successfully within this strict timeframe, the distribution is not considered taxable income and avoids penalties.

An important aspect of this rule is the “one-rollover-per-year” limitation, which applies to IRA-to-IRA indirect rollovers. This means an individual can only perform one such indirect rollover across all their IRAs, regardless of the number of accounts, within any 12-month period. The 12-month period begins on the date the distribution is received. Failing to re-deposit the funds within the 60-day window results in the entire amount being treated as a taxable distribution, subject to income tax and potentially the 10% early withdrawal penalty if the account holder is under age 59½. It is important to note that direct trustee-to-trustee transfers, where funds move directly between financial institutions without the account holder taking possession, are not subject to this one-year limitation.

Distinguishing IRA Access from Other Retirement Plan Loans

A common misconception is that IRAs operate similarly to employer-sponsored retirement plans, such as 401(k)s, regarding loan provisions. Unlike IRAs, employer-sponsored plans like 401(k)s, 403(b)s, and 457(b)s can permit loans to participants. The availability and terms of these loans are determined by the specific plan’s rules, not directly by IRS mandate for all plans.

Loans from 401(k) plans have specific limitations. A participant can borrow up to 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.

Repayment terms for these loans extend for five years, with interest paid back into the participant’s own account. However, if the loan is used to purchase a primary residence, the repayment period may be extended to 15 years. Repayments are made through regular payroll deductions and must occur at least quarterly.

Failure to repay a 401(k) loan according to the terms, or if employment ends with an outstanding balance, can lead to the unpaid amount being treated as a taxable distribution. This deemed distribution would then be subject to income tax and, if the participant is under age 59½, the 10% early withdrawal penalty. If employment terminates, the outstanding loan balance becomes due by the tax filing deadline of the following year. These loan provisions are unique to employer-sponsored plans and do not extend to any type of IRA.