How to Borrow From Your IRA Without a Penalty

Individual Retirement Arrangements (IRAs) are a tool for retirement savings, offering tax advantages for long-term financial planning. Funds held within an IRA are generally intended for use in retirement, after age 59½. Taking distributions before this age typically results in the amount being included in ordinary income for tax purposes, along with an additional 10% federal early withdrawal penalty.

IRAs do not permit “loans” like some employer-sponsored plans. Any money taken out of an IRA is considered a distribution. However, specific circumstances allow access to IRA funds before age 59½ without incurring the standard 10% early withdrawal penalty. These exceptions are distinct from traditional loans and are governed by IRS guidelines.

Understanding Penalty-Free IRA Withdrawals

Accessing IRA funds before age 59½ without penalty is possible under specific circumstances, each with requirements and limitations. These exceptions acknowledge life events or financial hardships. While the 10% penalty is waived, the distributed amount is still subject to ordinary income tax, unless it involves a Roth IRA’s tax-free contributions.

Exceptions to the 10% Early Withdrawal Penalty

Up to $10,000 for a qualified first-time home purchase. Funds must be used for qualified acquisition costs of a primary residence for the IRA owner, spouse, child, grandchild, or ancestor, typically within 120 days. Qualification requires the individual (and spouse, if applicable) not to have owned a home in the two years prior to the new home’s acquisition.
Qualified higher education expenses for the IRA owner, spouse, children, or grandchildren, including tuition, fees, books, supplies, equipment, and sometimes room and board, for a student enrolled at an eligible educational institution. There is no specific dollar limit, provided the withdrawal directly covers these costs.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI). This applies even if you do not itemize deductions, provided the expenses are otherwise deductible medical care costs.
Total and permanent disability of the IRA owner. The IRS defines disability as being unable to engage in any substantial gainful activity due to a physical or mental condition, which a physician must determine to be of indefinite duration or expected to result in death.
Qualified birth or adoption expenses. Up to $5,000 can be withdrawn per birth or adoption, within one year of the child’s birth or adoption becoming final. The adoption must involve an individual under age 18 or someone physically or mentally incapable of self-support.
Health insurance premiums for individuals receiving unemployment compensation for at least 12 consecutive weeks. This applies only to amounts used for medical insurance for the individual, spouse, and dependents during periods of unemployment.
Substantially equal periodic payments (SEPP), also known as 72(t) payments. These must be calculated using an IRS-approved method (such as required minimum distribution, amortization, or annuitization) based on the IRA owner’s life expectancy or joint life expectancy with a beneficiary. Payments must continue for at least five years or until the IRA owner reaches age 59½, whichever is later, to avoid recapture penalties.

For Roth IRAs, contributions can always be withdrawn tax-free and penalty-free at any time. However, earnings are subject to both income tax and the 10% penalty if withdrawn before age 59½ or if the account has not been open for at least five years (the five-year rule), unless another exception applies.

Executing a Penalty-Free Withdrawal

Once qualified for a penalty-free withdrawal, contact your IRA custodian. Financial institutions require specific distribution request forms to specify the amount and type of withdrawal.

These forms require indicating the reason for withdrawal, crucial for correct IRS reporting. While the custodian reports the distribution on Form 1099-R (showing gross and taxable amounts, often with a distribution code in Box 7), you must claim the exception on your tax return.

To claim a penalty exception and avoid the 10% additional tax, file IRS Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” with your federal income tax return. On Form 5329, enter the specific exception code for your penalty-free withdrawal, such as for disability, first-time home purchases, or education expenses.

Maintain thorough records and documentation supporting eligibility for the claimed exception (e.g., receipts, medical bills, enrollment verification). While not usually submitted with your tax return, this documentation must be available if the IRS requests it for verification.

The 60-Day Rollover Rule

The 60-day rollover rule offers a temporary way to access IRA funds without immediate taxes or penalties, resembling a short-term, interest-free “loan.” You can withdraw funds from an IRA, provided the entire amount is redeposited into the same or another eligible retirement account within 60 calendar days. This provides a brief window of liquidity, distinct from other penalty-free withdrawal exceptions.

If funds are not fully redeposited within the 60-day timeframe, the distribution becomes taxable as ordinary income. If you are under age 59½ and no other exception applies, the 10% early withdrawal penalty will be assessed on the amount not rolled over. Adhering to this deadline is essential.

A limitation of the 60-day rollover is the “one-per-year” rule. You can complete only one indirect rollover from any of your IRAs to any other IRA (or the same IRA) within any 12-month period. This restriction applies to all IRAs you own, not just per account. For example, if you complete an indirect rollover from one IRA, you cannot do another from any of your other IRAs for 12 months.

Differentiate indirect rollovers from direct rollovers, also known as trustee-to-trustee transfers. In a direct rollover, funds move directly between accounts without you taking possession. Direct rollovers are not subject to the 60-day time limit or the one-per-year rule, offering a safer way to move retirement assets. Use the 60-day indirect rollover with caution due to its strict limitations and potential for significant tax consequences if rules are not followed precisely.