Can You Take a Loan From a Traditional IRA?

Many individuals with retirement savings wonder if they can access these funds for immediate financial needs. While these accounts provide tax advantages for long-term savings, the rules for accessing money before retirement are specific.

The Prohibited Transaction Rule

Directly borrowing from a Traditional IRA is not allowed under federal tax law. The Internal Revenue Service (IRS) explicitly forbids using your IRA as collateral for a loan or borrowing from it in any conventional sense. This action falls under a category of activities known as “prohibited transactions.”

A key concept in this regulation is that the IRA owner is considered a “disqualified person.” This means the owner cannot engage in any transaction that directly benefits them before retirement, such as borrowing from the account. If an individual pledges the account as security for a loan, it is also treated as a prohibited transaction. This is a significant difference from many 401(k) plans, which often have provisions that permit participants to take out loans against their account balances.

Consequences of an IRA Loan

Engaging in a prohibited transaction, such as taking a loan from your IRA, carries severe consequences. If an account holder borrows from their IRA, the account immediately loses its status as an IRA as of the first day of the tax year in which the transaction occurred. The fair market value of the entire IRA is then treated as if it were distributed to the owner. This amount becomes part of the owner’s gross income for that year and is subject to ordinary income taxes. If the account holder is under the age of 59½, the deemed distribution is also subject to a 10% early withdrawal penalty on top of the income tax.

Using the 60-Day Rollover Rule

While a formal loan is prohibited, there is a method that allows for short-term access to IRA funds. The IRS permits you to withdraw money from your IRA without tax or penalty, provided you redeposit the full amount within 60 days. This is often referred to as a 60-day rollover and can function as a short-term, interest-free loan. The 60-day period begins on the day you receive the distribution from your IRA custodian.

The amount withdrawn would be subject to income tax and the 10% early withdrawal penalty if you are under age 59½. If you withheld taxes from the initial distribution, you must use other funds to make up the difference and roll over the full pre-tax amount.

The IRS also enforces a “one-rollover-per-year” rule. This rule states that you can only make one such IRA-to-IRA rollover across all of your IRAs in any 12-month period. This limitation applies to the aggregate of all IRAs you own, not to each individual account.

Early Withdrawals and Penalty Exceptions

You can take a distribution from your Traditional IRA at any time. However, these withdrawals are subject to ordinary income tax. For those under age 59½, a 10% early withdrawal penalty applies to the amount withdrawn.

The tax code provides several exceptions that allow for penalty-free withdrawals, although income tax will still be due on the distribution. One common exception is for a first-time home purchase, which allows for a penalty-free withdrawal of up to $10,000. Another exception is for qualified higher education expenses for yourself, your spouse, children, or grandchildren.

Other notable exceptions include withdrawals to cover certain medical expenses exceeding a specific percentage of your adjusted gross income, distributions made due to a total and permanent disability, or payments made to a beneficiary after the IRA owner’s death. There are also provisions for individuals experiencing domestic abuse or those impacted by a federally declared disaster.