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Can you borrow from an IRA?

Withdrawing from a 401(k) or a Roth IRA — or taking out a personal loan — might make the most sense

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IRA accounts are tax-advantaged to encourage you to save for retirement. Loans from these accounts aren’t permitted, but withdrawals are.

An IRA withdrawal can help tide you over during an emergency, but the penalties often outweigh the benefits. Make sure to understand the consequences of early withdrawals so you can better manage your retirement savings.

Key insights

  • There are strict rules for IRA withdrawals; you risk a 10% penalty and substantial tax bill if you take a distribution.
  • Qualified higher education expenses and first-time home purchases are exceptions to the 10% withdrawal penalty.
  • Remember that the more money you withdraw, the less money you have earning returns for your retirement.

What is the penalty for early IRA withdrawals?

The federal government imposes a 10% penalty for most IRA withdrawals before you reach age 59½ (with some exceptions), and the money you withdraw is taxed as income. There’s also an opportunity cost to consider. The money you remove from the account will no longer accumulate returns, which can substantially limit your retirement account’s growth.

If you withdraw from your IRA before you’re 59 ½, you’ll have to pay a 10% penalty on top of income tax.

Noah Schwab, a certified financial planner for Stewardship Concepts Financial Services, LLC, in Spokane, Washington, where he helps small business owners with financial planning, said one of his clients experienced these consequences firsthand when he withdrew $5,000 to help cover expenses between jobs.

Schwab explained, “Being under 59½,  the client had a 10% penalty and 12% income taxes. Withdrawing $5,000 meant their take-home amount was $3,900. The biggest consequence was the potential growth of that money in retirement. If they had an 8% annual return, over 30 years a $5,000 distribution is a loss of $50,313.”

How to withdraw from IRA without penalty

The IRS lists a number of exceptions to the 10% tax on early distributions (withdrawals). You can make penalty-free withdrawals from an IRA before age 59½ if:

  • You become totally and permanently disabled.
  • The owner of the IRA dies.
  • You’re a qualified military reservist called to active duty.

You can also make penalty-free withdrawals when you’re spending the money on an approved expense, which includes:

  • Qualified educational expenses
  • Purchasing your first home (up to $10,000)
  • Health insurance premiums during a period of unemployment
  • Unreimbursed medical expenses that exceed 10% of your adjusted gross income
  • Equal periodic payments as a form of income
  • Rollovers

IRA owners can also avoid the penalty by repaying any funds borrowed from the IRA within 60 days. Rather than repaying the money to the IRA account, you can also roll it into another retirement account, such as a Roth IRA.

Other ways to borrow from retirement accounts

If you’re under age 59½, it can be more cost-effective to borrow funds from a different retirement account or to take out a low-interest loan.

401(k) and 403(b) loans typically can only be repaid through payroll. If you leave your job, the balance of the loan is due immediately.”
— Justin Stevens, certified financial planner
Younger borrowers might benefit more from taking out a personal loan or withdrawing from a 401(k) or Roth IRA.

401(k) and 403(b) plans

401(k) and 403(b) plans may include a loan provision that lets you borrow funds without a penalty charge or taxes on the withdrawal. You will have to pay back the money borrowed (plus interest) within five years — but, because you borrow the money from yourself, interest payments are credited to your account.

According to the IRS, the maximum amount you can borrow from a qualified 401(k) or 403(b) is “the greater of $10,000 or 50% of your vested account balance, or $50,000, whichever is less.”

Withdrawing from your 401(k) or 403(b) does come with some risk: “Be careful with these types of loans,” explained Justin Stevens, a certified financial planner and president of O’Keefe Stevens Advisory, a financial planning company in Rochester, New York. “401(k) and 403(b) loans typically can only be repaid through payroll. If you leave your job, the balance of the loan is due immediately.”

Roth IRAs

You can access your contributions — not the earnings — to a Roth IRA when you need them without penalty at any age. And, because the contributions are made with after-tax dollars, you won’t owe taxes on the contributions you withdraw.

Personal loans

Taking out a personal loan is always an option if you need funds quickly for an emergency or a necessary repair. Just make sure you find an APR, loan term and repayment plan that works for you — and avoid predatory lenders (usually, these lenders have APRs that exceed 35.99%).

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    What happens if I don’t pay back money from my IRA?

    You can withdraw money from your IRA without penalty before age 59½ as long as you pay the funds back within 60 days. Failure to repay the money means you need to include it as part of your taxable income (and may need to pay a 10% tax penalty).

    How much can I borrow from my IRA to buy a house?

    Qualified first-time homebuyers can withdraw up to $10,000 to put toward the purchase of their home without incurring the 10% early withdrawal tax.

    Can I use my IRA as collateral for a loan?

    The IRS prohibits using your IRA as collateral for a loan. If you pledge part of the IRA as collateral, the IRS views the pledged amount as a distribution.

    Bottom line

    Ideally, your IRA account remains untouched until you turn 59 ½ — this way, you can avoid paying the 10% penalty.

    Even if you withdraw the funds and are exempt from the additional tax, however, it may not be the best decision. You’d still miss out on potential retirement savings growth, which could come in handy later on. It might be smarter to use your bank account, Roth IRA, a HELOC or your 401(k) before tapping into your IRA. You can also take out a low-interest loan if you’re confident you can pay it back on time.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. IRS, “Retirement Topics - Exceptions to Tax on Early Distributions.” Accessed June 8, 2022.
    2. IRS, “What If I withdraw money from my IRA?” Accessed June 8, 2022.
    3. IRS, “Retirement Plans FAQs regarding Loans.” Accessed June 8, 2022.
    4. IRS, “IRA FAQs - Distributions (Withdrawals).” Accessed June 15, 2022.
    5. IRS, “Considering a loan from your 401(k) plan?” Accessed June 15, 2022.
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