Can You Take a Loan Out From Your IRA?

An Individual Retirement Account (IRA) is a tax-advantaged savings vehicle designed to help individuals accumulate funds for retirement. These accounts, which include Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs, offer various tax benefits that encourage long-term savings. Understanding the specific rules governing these accounts is important for effective retirement planning.

The Core Rule for IRA Loans

Generally, individuals cannot take a loan directly from an IRA. Any money removed from an IRA that is not a qualified distribution or a proper rollover is classified by the Internal Revenue Service (IRS) as a taxable withdrawal, not a loan.

IRAs are not structured to permit borrowing against their assets in the same manner as some other financial instruments or retirement plans. Attempting to “borrow” directly from an IRA is considered a “prohibited transaction” by the IRS. If such a transaction occurs, the entire IRA account may cease to be recognized as an IRA as of the first day of that year. The full value of the account is then treated as if it were distributed to the IRA owner, potentially leading to significant tax consequences.

Why IRAs Differ from Other Retirement Plans

A common point of confusion arises when comparing IRAs with employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and 457(b)s. While IRAs generally do not allow loans, many employer-sponsored plans do permit participants to borrow against their vested account balance. This distinction stems from the fundamental differences in how these plans are established and regulated, as employer-sponsored plans are governed by specific plan documents that outline provisions for loans, including repayment terms, interest rates, and loan limits.

In contrast, IRAs are individual accounts that operate under a different set of IRS rules, which do not include provisions for direct loans. This difference underscores the individualized nature of IRAs versus the collective, employer-managed structure of plans like 401(k)s. The primary purpose of an IRA is long-term retirement savings, with strict guidelines to ensure funds remain dedicated to that goal.

Consequences of Improper IRA Withdrawals

If an individual attempts to take a “loan” from an IRA, the IRS treats the amount as an ordinary distribution. This means the entire amount “borrowed” becomes subject to federal income tax, and potentially state income tax, in the year of the “withdrawal”. This tax liability applies to the full sum, not just any theoretical interest or unpaid balance.

Furthermore, if the IRA owner is under age 59½, the distribution is subject to an additional 10% early withdrawal penalty under IRS Code Section 72(t). There are specific exceptions to this penalty, but without meeting one, both income tax and the penalty apply.

Legitimate Ways to Access IRA Funds (Not Loans)

While direct loans from IRAs are not permitted, there are legitimate, IRS-approved methods to access IRA funds without incurring prohibited transaction penalties. One such method is the 60-day indirect rollover rule under IRS Code Section 408(d)(3). This rule allows an individual to withdraw funds from an IRA, use them for up to 60 days, and then redeposit the full amount into the same or another IRA or qualified retirement plan without tax or penalty.

This 60-day rollover can only be performed once every 12 months per person, across all IRAs they own. Failure to redeposit the funds within the strict 60-day window results in the withdrawal being treated as a taxable distribution, subject to income tax and potentially the 10% early withdrawal penalty if the individual is under age 59½. This mechanism is not a loan, but rather a temporary, short-term access option with stringent requirements.

There are also several IRS-recognized exceptions to the 10% early withdrawal penalty for distributions taken before age 59½, although the distributions are generally still taxable as ordinary income. These exceptions include withdrawals for qualified higher education expenses for the IRA owner, their spouse, children, or grandchildren, up to the amount of qualified expenses. Another exception covers unreimbursed medical expenses that exceed 7.5% of adjusted gross income.

Other penalty exceptions may apply for a first-time home purchase, limited to $10,000. Distributions due to total and permanent disability also avoid the 10% penalty, provided the individual meets the IRS definition of disabled. Finally, individuals can take a series of substantially equal periodic payments (SEPP) without incurring the penalty, provided the payments continue for at least five years or until age 59½, whichever is later. These are distributions with specific rules, not loans.