What you need to know about borrowing from an IRA
IRA | IRA loan | Tax penalty | Retirement | February 21, 2024
This Week's Quote:
“Whatever you are, be a good one."
- Abraham Lincoln
If you’re short on funds and have exhausted other options, you might consider borrowing money from your retirement plan. In some cases, this can be a cheaper alternative than using a credit card or taking out a personal loan. But if you’re not careful, it can cost you.
Many 401(k) accounts and other employer-sponsored retirement plans make it easy to borrow money and repay it over time, often with interest. However, with an individual retirement account (IRA), that’s not the case.
Still, some scenarios exist where you may “borrow” money from an IRA by withdrawing it and re-depositing it. In some cases, you can even withdraw from an IRA without penalties or interest. But before you begin, it’s essential to understand the risks and drawbacks, including potential IRS penalties.
Can you borrow money from an IRA?
No, you can not borrow money from an IRA, at least not in the traditional sense of taking out a loan. The IRS prohibits loans from a traditional or Roth IRA. Also, you may face penalties if you withdraw money from your IRA before age 59 ½ and don’t return it within 60 days. According to the IRS, early withdrawal usually triggers a 10% tax penalty, and the amount you withdraw is subject to federal taxes.
Important: If you don’t return money you withdraw from an IRA within 60 days, you could trigger a 10% penalty and be taxed on the amount withdrawn.
However, there are exceptions to the IRA early withdrawal penalty, allowing you to make early withdrawals from your IRA penalty-free. But you’ll likely have to pay income tax on the distribution.
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This Week’s Author, Mark Bradstreet