A self-directed IRA is a versatile financial resource for retirement, but most of the time you cannot use it for a loan. In fact, IRS guidelines make it plain: "If the owner of an IRA borrows from the IRA, the IRA is no longer an IRA, and the value of the entire IRA is included in the owner's income."
Under some circumstances, you can use it to take out a short-term personal loan but it involves taking advantage of a loophole in a different rule. There are, however, several restrictions to keep in mind. In most cases, the IRS will decide that the account no longer qualifies for deferred taxation, as mentioned above. The lenders (custodians) who make loans to IRAs will also impose additional requirements.
- An individual retirement account (IRA) is a common source of savings among individuals.
- According to IRS rules, however, you cannot take a loan from an IRA as you can with a 401(k) account.
- You may be able to take advantage of a 60-day window to rollover funds and instead use the money as a short-term loan.
- If you don't pay it back on time, or trigger other restrictions, however, you will lose the tax-favored status of the account and be subject to penalties.
How to Structure an IRA "Loan"
Unlike a 401(k) retirement account, qualified individual retirement accounts (IRAs) do not let savers pledge their account collateral against a personal loan.
There is, however, one notable exception to this limitation: if you only need the money for a short period of time, specifically 60 days or less. This is a loophole where you can take advantage of the rollover rule, which is normally intended to facilitate the time to rollover one retirement account to another, where the IRS allows you to withdraw money from your IRA if you redeposit it in a qualified retirement account within the next 60 days - this could be the same IRA or a new one. Note that you are allowed only one IRA rollover in any 12-month period. In other words, you can't simply borrow the money from your IRA again after 60 days have passed. The IRS also made this strategy more difficult since 2015, so revisit these rules if it's something you've done in the past.
For example, if you need $4,000 to help pay for a child's tuition this month, but you won't get paid again until next month, you could withdraw the money from my IRA and utilize it like a short-term loan and simply replace it once I get paid.
Alternatives to Borrowing Against Your IRA
If you can't borrow from your IRA, what can you do? First of all, if you need money in a pinch it's always best to use assets that are not already earmarked for retirement, if possible. But if you need the funds at any cost, you can evaluate the following options:
Other retirement plans: You might also have the option to borrow against balances in workplace retirement plans such as 401(k) plans. Your plan must allow loans (not all of them do), and you’re taking several risks when you borrow. In addition to raiding your savings, you’ll have to pay taxes (and possibly penalties) if you are not able to repay the loan. Consider what will happen if you change jobs before repaying in full. It might even be possible to move funds from an IRA into your 401k, increasing the amount of money you can borrow. Work with your HR department, financial planner, and tax adviser to understand the pros and cons of that technique.
Roth IRAs: Roth IRAs may be able to provide funds you need, but (again), you’ll lose ground on your retirement goals. With Roth, you may be able to take your contributions out without triggering any tax liability. Ask your tax preparer if that’s an option in your case.
Look elsewhere: To protect your retirement and minimize tax complications, it may be better to borrow elsewhere. An unsecured loan (where you don’t pledge anything as collateral) may be all you need. Those loans are available from peer-to-peer lending services, family members, and banks or credit unions.