Can I Borrow From an IRA Without Penalty?

Individual Retirement Accounts (IRAs) offer account holders several tax advantages, such as tax credits, tax deductions, and tax deferrals on earnings. However, when money is withdrawn, the distribution is fully taxable as income.

Depending on the account holder's age, the withdrawal may also be subject to the IRS premature withdrawal penalty of 10%. However, there are ways to avoid taxation and the IRS penalty for funds withdrawn if the full amount is repaid within 60 days.

Key Takeaways

  • Withdrawals from IRAs are taxable and may be subject to an IRS premature penalty.
  • Rollovers are not subject to taxation or IRS penalties.
  • The account holder must roll over funds to another qualified account or back into their IRA within 60 days from the date of the distribution.
  • Loans are not allowed from IRAs.
  • Failure to repay or roll over funds within 60 days results in the distribution becoming taxable and possibly subject to an IRS penalty.

The 60-Day Rule

The IRS allows tax-free rollovers from an IRA to another retirement plan or IRA within 60 days from the date of distribution without triggering the premature penalty. Money can be transferred from custodian to custodian or from the custodian to the account holder, who then must deposit the funds into a retirement account or IRA.

IRA account holders, who have receipt of the funds, must roll over the proceeds within 60 days to avoid taxation and a penalty. If beyond the 60 days, the entire distribution is taxable and may be subject to the 10% IRS premature withdrawal penalty (for account holders under age 59 1/2).

The IRS may waive the 60-day limit under certain circumstances. A late rollover is allowed if the IRA owner is entitled to an automatic waiver, requests and receives an extension from the IRS, or qualifies for and uses the self-certification process.

The IRS restricts certain IRA withdrawals from being redeposited or rolled over. These include:

Rolling-over Funds Instead of Borrowing From an IRA

IRAs do not allow account owners to borrow funds. Instead, they can withdraw or roll over funds to another qualified account or IRA or redeposited into the same IRA. The closest way to borrow money from an IRA is to withdraw funds and then redeposit it back into the same account within 60 days. However, doing so comes with risks.

This is technically not a "loan," but a provision that allows temporary use of IRA savings outside of your IRA. This is by definition, a "distribution" and a "rollover" of the distributed amount.

  • Generally, you can perform an IRA-to-IRA rollover only once during 12 months. As of Jan. 1, 2015, the tax court ruled that all of your traditional IRAs are treated as one IRA for this purpose. (Before this date, the IRS applied the rule separately to each of your IRAs.)
  • The same assets you withdraw must be the same assets that you roll over to your IRA. For instance, if you withdraw cash, you must roll over cash.
  • Only eligible amounts can be rolled over.
  • Withdrawal charges may be deducted by the custodian. IRAs can be held in different types of accounts, such as annuities, which may have a withdrawal charge schedule.
  • If a portion of the withdrawal is rolled over, the difference (the amount not rolled over) is taxable as income.

Taxes and Fees

Rollovers and transfers of qualified funds are non-taxable events and are not subject to IRS penalties. However, the rollover becomes taxable if the funds are not placed back into the same account or another qualified account within 60 days.

If the rollover amount does not equal the amount of the original distribution, the difference is taxable as income and may be subject to an early withdrawal penalty. For example, a 57-year-old IRA account holder withdraws $5,000 but only rolls over $4,000 into an IRA within 60 days. The difference of $1,000 is taxable and subject to a 10% IRS penalty.

Withdrawals may also be subject to charges or penalty fees from the custodian. For example, annuities are retirement accounts that often have withdrawal charge schedules that typically range from 7 to 10 years. Charges typically decrease annually.

Consider an IRA annuity owner withdrawing funds in the first contract year. They will likely have a higher charge than an account holder withdrawing funds in their tenth contract year. Someone withdrawing funds outside of the withdrawal charge schedule will not incur charges.

Also, some custodians charge a flat fee for all withdrawals regardless of how long you've had the account. It's important to understand the rules and provisions of the IRA account before requesting withdrawals, even if the money is repaid within the rollover timeframe.

Failure to Redeposit Money

The IRS allows 60 days for funds to be withdrawn and rolled over into a qualified retirement account or IRA. Under certain circumstances, the deadline can be waived. If funds are not rolled over or redeposited within 60 days and the account holder does not qualify for the waiver, the distribution is taxable as income and may be subject to the IRS penalty of 10%.

There is no limit to the amount that can be rolled over from an IRA.

If the money is not redeposited, it will be considered a taxable withdrawal, not a rollover. As a result, the one rollover per year limit has not been met, thus allowing the IRA owner another opportunity to withdraw and roll over funds.

Special Considerations Due to COVID-19

Rules about borrowing from your IRA have changed because of the March 2020 passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act, meant to provide economic relief amid the COVID-19 pandemic, gives eligible participants more leeway in terms of the length of the loan and the timeline for repayment.

The Act defines an eligible participant as a person who has been diagnosed with COVID-19, has a spouse or dependent diagnosed with COVID-19, has experienced a layoff, furlough, reduction in hours, or inability to work due to COVID-19, or has a lack of childcare because of COVID-19.

Eligible participants can take an early withdrawal of up to $100,000 from 401(k)s, 403(b)s, 457s, and traditional IRAs without paying a 10% penalty. An individual has up to three years to pay the taxes on the early withdrawal or to redeposit the money back into their retirement account (versus the standard repayment requirement of 60 days).

Retirement plans are not required by law to accept this modification of early withdrawal rules, but most plans are expected to follow suit. The law covers withdrawals made between Jan. 1, 2020, and Dec. 30, 2020.

How Much Can You Borrow From An IRA Without Penalty?

IRAs do not allow for loans. However, funds withdrawn and repaid into the IRA account within 60 days avoid the IRS penalty. Note that the IRS allows only one rollover every 12 months.

Can You Borrow From Your IRA to Buy a House?

Loans from an IRA are not allowed. However, you can withdraw money from your IRA to buy a house. The withdrawal is taxable and may be subject to an IRS penalty of 10% if you are under age 59 1/2. If you can repay the whole amount within 60 days, you can avoid taxes and an IRS penalty.

Can You Borrow From a Roth IRA?

The IRS does not permit loans from Roth IRAs. You can withdraw from your Roth IRA, however. Withdrawals of contributions are non-taxable. However, most Roth IRAs follow the Last In, First Out (LIFO) method for withdrawals. As a result, earnings are withdrawn first, then principal or contributions. Earnings are not subject to taxes or an IRS penalty if the account holder is age 59 1/2 or older and the account is at least five years old. If not, the earnings may be taxable as income and subject to the IRS early withdrawal penalty.

Can You Borrow From a SIMPLE or SEP-IRA?

Like traditional and Roth IRAs, loans are not allowed from SIMPLE and SEP-IRAs. Money can be withdrawn or rolled over. The IRS only allows rollovers from SIMPLE IRAs to SIMPLE IRAs within the first two years. If rolled into a non-SIMPLE account, the distribution is taxable as income. Akin to other IRAs, only one rollover is allowed per 12 months.

The Bottom Line

An IRA is a tax-advantaged retirement account with special provisions for rolling over funds. The IRS allows participants 60 days to roll over money withdrawn from their IRA into a qualified retirement account, another IRA, or back into the same IRA. If done within 60 days, the withdrawal is not taxable or subject to IRS penalties. However, consider the risks before taking constructive receipt of funds from an IRA.

Article Sources
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  1. Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions."

  2. Internal Revenue Service. "Retirement Plans FAQs relating to Waivers of the 60-Day Rollover Requirement."

  3. Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions."

  4. Internal Revenue Service. "Topic No. 413 Rollovers from Retirement Plans."

  5. Internal Revenue Service. "Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers."

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