How to Borrow Money From an IRA Account

An Individual Retirement Account (IRA) is a savings plan for retirement with tax advantages. Unlike a 401(k) or bank, you cannot take a loan from an IRA. Instead, accessing funds involves a distribution, subject to tax rules, potential penalties, and reporting requirements. These rules encourage long-term saving, making early access costly unless specific conditions are met.

Understanding IRA Distributions and Their Consequences

Taking money from an IRA is a distribution with tax implications. Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are typically tax-free if conditions are met, such as the account being open for five years and the owner being age 59½ or older.

Distributions before age 59½ often incur a 10% additional tax penalty, known as an early withdrawal penalty. This penalty applies on top of regular income tax.

The 10% additional tax applies to the taxable portion of a traditional IRA distribution. For a Roth IRA, this penalty generally applies to earnings if the distribution is not qualified. Understanding the IRA type and the funds withdrawn (contributions versus earnings) is crucial for anticipating the tax impact.

The 60-Day Rollover Rule for Temporary Access

The 60-day indirect rollover rule can act as a short-term, interest-free “loan” from an IRA. You receive a distribution and have 60 days to deposit the funds into another IRA. If redeposited within this timeframe, it is treated as a tax-free rollover, avoiding income tax and early withdrawal penalties.

Strict adherence to the 60-day deadline is crucial; failure results in the distribution becoming fully taxable. If the IRA owner is under age 59½, the 10% early withdrawal penalty also applies to the unrolled amount. This rule has a “once-per-year” limitation across all IRAs within any 12-month period.

Any tax withholding on the initial distribution must be made up from other funds to complete the full rollover. Direct trustee-to-trustee transfers are not subject to the 60-day or once-per-year rules and are a safer method for moving IRA funds without tax consequences.

Common Exceptions to Early Withdrawal Penalties

Distributions from an IRA before age 59½ are generally subject to a 10% additional tax, but certain situations allow penalty-free withdrawals. Even if the penalty is waived, traditional IRA distributions are still subject to ordinary income tax.

Penalty exceptions include:

• Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI).
• Health insurance premiums if unemployed and receiving unemployment compensation for at least 12 consecutive weeks.
• Qualified higher education expenses for yourself, spouse, children, or grandchildren, covering tuition, fees, books, supplies, and potentially room and board for half-time students.
• A first-time home purchase, up to $10,000 in lifetime distributions.
• Distributions as part of a series of substantially equal periodic payments (SEPP) based on life expectancy, following IRS calculation methods.
• Distributions due to the death or total and permanent disability of the IRA owner.
• Qualified reservist distributions, certain domestic abuse victim distributions, and distributions to satisfy an IRS levy.

Steps to Access Funds from Your IRA

To access IRA funds, contact the financial institution holding your IRA. Most custodians require specific distribution request forms.

Funds can be received via direct deposit or physical check. When requesting a distribution, you will be asked about federal income tax withholding. For traditional IRA distributions, a default 10% federal withholding often applies, but you can elect out or choose a different percentage. State income tax withholding may also apply.

After processing, the IRA custodian reports the withdrawal to the Internal Revenue Service (IRS) on Form 1099-R, generally by mid-February of the following year. This form details the gross distribution, taxable amount, and any federal income tax withheld.