How Much Can You Borrow From Your IRA?

An Individual Retirement Arrangement (IRA) offers tax advantages for long-term savings. Many believe they can “borrow” directly from an IRA like a traditional loan. However, direct loans from an IRA are not permitted. Any money removed is treated as a distribution, carrying specific tax implications.

Understanding IRA Distributions

Any funds withdrawn from an IRA are classified as a “distribution,” not a loan. These distributions are subject to ordinary income tax in the year they are received. For individuals under age 59½, an additional 10% early withdrawal penalty applies to the taxable portion of the distribution, as outlined in Internal Revenue Code Section 72.

Unlike a loan, there is no mechanism to repay a distribution. Once funds are distributed, they are permanently removed from the tax-advantaged account. This reduces the overall balance intended for retirement and impacts future savings growth.

Navigating Early Withdrawal Exceptions

While the 10% early withdrawal penalty applies to distributions taken before age 59½, several specific exceptions exist where this penalty can be avoided. It is important to remember that even with an exception, distributed funds are still subject to ordinary income tax. These exceptions are intended to provide flexibility for certain significant life events without incurring the additional penalty.

Exceptions that may qualify for a penalty waiver include:
First-time home purchase, with a lifetime limit of $10,000.
Qualified higher education expenses for yourself, a spouse, or dependents.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Distributions due to total and permanent disability.
Distributions taken as part of a series of substantially equal periodic payments (SEPPs) based on life expectancy.
Qualified birth or adoption expenses, up to $5,000 per individual per event.

The 60-Day Rollover Rule

The 60-day indirect rollover rule is the closest an IRA owner can come to temporarily accessing their retirement funds without permanent tax consequences. Under this rule, an individual can withdraw money from an IRA and then re-deposit the same amount into the same or a different IRA, or another eligible retirement plan, within 60 days. If the re-deposit occurs within this timeframe, the distribution is not considered taxable income and avoids the early withdrawal penalty.

This rule functions as a short-term holding period rather than a true loan, as the funds must be returned to a retirement account. There is a limitation of one indirect rollover per 12-month period across all an individual’s IRAs. If the funds are not fully redeposited within the 60-day window, the entire amount becomes a taxable distribution and may be subject to the 10% early withdrawal penalty if the individual is under age 59½.

Comparing IRA and 401(k) Access

The common misunderstanding about “borrowing” from an IRA often stems from a comparison with employer-sponsored 401(k) plans. Unlike IRAs, many 401(k) plans do permit participants to take loans against their vested account balance. This is a significant distinction in how funds can be accessed from these two types of retirement accounts.

A 401(k) loan typically allows borrowing up to 50% of the vested account balance, or $50,000, whichever amount is less. These loans are repaid with interest, which is paid back to the participant’s own account, and are not considered taxable distributions if repaid according to the terms. This contrasts sharply with IRAs, where any withdrawal is a distribution that is generally taxable and potentially penalized.