How can you borrow from a Roth IRA?

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February 2017
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Contrary to popular belief, there is no “borrowing” from Roth IRAs or Traditional IRAs. There are only distributions. “Borrowing” from a Roth IRA or Traditional IRA is a misconception likely due to the ability to borrow from some 401(k) plans. This is accomplished via a 401(k) loan. I wrote an article about 401(k) loans called 401k Loan – 3 Reasons Not To Borrow that goes into more detail.

With regard to Roth IRA distributions, there are ways to access the funds, but it’s not borrowing. Borrowing implies that you can pay it back. You can’t pay back distributions taken from Roth IRAs or Traditional IRAs. There is an exception for distributions from an IRA that are paid back within 60 days. However, that is a totally different subject and it is also a commonly misunderstood rule.

Roth IRA withdrawals (distributions) of principal are tax and penalty free. The reason is that contributions are made with after tax dollars. The IRS has already taken their bite with regard to the principal (what you contributed). The earnings are a different story. While there can be exceptions, early withdrawals can be subject to taxes and penalties that are attributable to earnings (not principal). If you’re looking to take a withdrawal from the Roth IRA due to education, first time home purchase, or to help with a disability, you should definitely read up on the exceptions.

Early withdrawals are those made prior to age 59 ½. Withdrawals made after age 59 ½ and after having the account for at least five years will allow for withdrawals that are tax and penalty free. I wrote an article called Roth IRA – 5 Things Retirement Savers Must Know that covers other important considerations of investing in a Roth IRA. I hope you find it helpful.

Please note that this should not be considered investment advice and is only educational in nature. Be sure to consult your own investment, tax, or legal professional for help with your specific situation.

Best of luck!

David N. Waldrop, CFP®

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