Can You Take Out a Loan From an IRA?

Individual Retirement Arrangements (IRAs) offer a valuable way to save for the future with distinct tax advantages. Many people wonder if they can “borrow” from their IRA accounts, similar to taking out a loan. Understanding how these retirement vehicles operate is important to avoid unexpected financial consequences.

The Concept of Borrowing from an IRA

Unlike some employer-sponsored retirement plans, such as a 401(k), you cannot take a direct loan from an Individual Retirement Arrangement (IRA). Any funds you remove from an IRA are generally considered a “withdrawal” or “distribution,” not a loan that you repay. The Internal Revenue Service (IRS) strictly prohibits borrowing from an IRA, and attempting to do so can lead to severe tax implications.

While 401(k) plans may allow loans, IRAs do not offer such a feature. Taking money out of an IRA is treated as a permanent distribution, which carries specific tax consequences depending on the type of IRA and your age at the time of withdrawal. If you take money out and later put it back, it is generally treated as a new contribution, unless it qualifies as a 60-day rollover.

Tax Implications of IRA Withdrawals

Withdrawing funds from an IRA has significant tax implications, which vary based on the type of IRA and the timing of the distribution. For traditional IRAs, contributions are often made on a pre-tax basis, meaning the money grows tax-deferred until withdrawal. When you take distributions from a traditional IRA, both the contributions and any accumulated earnings are typically subject to ordinary income tax rates in the year they are received.

If you withdraw funds from a traditional IRA before reaching age 59½, the distribution is generally considered an “early” or “premature” withdrawal. In addition to being taxed as ordinary income, these early withdrawals are usually subject to an additional 10% penalty tax. This penalty discourages early access to retirement savings.

Roth IRAs operate under different tax rules because contributions are made with after-tax dollars. This means that qualified distributions from a Roth IRA, including both contributions and earnings, are entirely tax-free and penalty-free. To be considered a qualified distribution, a Roth IRA must meet two conditions: the account must have been open for at least five years, and the distribution must occur after age 59½, due to disability, or upon the account owner’s death. If a Roth IRA distribution is non-qualified, the earnings portion may be subject to ordinary income tax and the 10% early withdrawal penalty, though contributions can generally be withdrawn tax-free at any time.

Avoiding Early Withdrawal Penalties

While early withdrawals from an IRA typically incur a 10% penalty, the IRS provides several exceptions where this additional tax can be avoided. These exceptions are detailed in IRS Publication 590-B.

One common exception is for Substantially Equal Periodic Payments (SEPPs), also known as 72(t) distributions. This allows fixed withdrawals over your life expectancy without penalty, provided payments continue for at least five years or until you reach age 59½, whichever is later. Another exception applies to withdrawals made due to total and permanent disability.

Funds used for unreimbursed medical expenses exceeding 7.5% of your adjusted gross income can also be withdrawn penalty-free. Similarly, if you become unemployed and use IRA funds to pay for health insurance premiums, the 10% penalty may be waived. A specific exception permits penalty-free withdrawals of up to $10,000 over a lifetime for a first-time home purchase, which can apply to you, your spouse, or certain family members. To qualify as a first-time homebuyer, you cannot have owned a primary residence in the two years prior.

Additionally, IRA withdrawals used for qualified higher education expenses for yourself, your spouse, children, or grandchildren are exempt from the early withdrawal penalty. These expenses include tuition, fees, books, and supplies, and potentially room and board if the student is enrolled at least half-time. The SECURE Act introduced a penalty exception for qualified birth or adoption distributions, allowing up to $5,000 per parent per child (up to a combined $10,000 for a couple) to be withdrawn penalty-free within one year of the birth or adoption. Other exceptions include distributions due to an IRS levy on the account or for qualified reservist distributions.