A self-directed IRA is a versatile account in which to save 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 a self-directed IRA (or any IRA) to take out the equivalent of a short-term personal loan. This involves taking advantage of a loophole in a different rule, known as the 60-day rollover rule. There are, however, several restrictions to keep in mind.
- Unlike 401(k) plans, you cannot take a loan from any type of IRA.
- You may be able to take advantage of a rollover rule loophole, which gives you 60 days to use the money as a short-term loan.
- If you don't pay it back on time or trigger other restrictions, you will lose the tax-favored status of the account and be subject to a penalty too.
Understanding the 60-Day Rollover Rule Loophole
Unlike a 401(k) retirement account, qualified individual retirement accounts (IRAs), including self-directed IRAs, do not let retirement 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. There is a loophole where you can take advantage of the rollover rule, which is normally intended to facilitate the time to roll over one retirement account to another.
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.
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 your IRA and use it as a short-term loan and simply replace it once you get paid.
You are allowed only one IRA rollover in any 12-month period, which means you can't simply borrow 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.
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. But if you need the funds at any cost, you can evaluate the following options:
Workplace retirement plans
You might also have the option to borrow against balances in workplace retirement plans, such as a 401(k). 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 advisor to understand the pros and cons of this technique.
Roth IRAs may be able to provide funds you need via the same loophole, but (again), you’ll lose ground on your retirement goals. With a Roth, you may be able to take your contributions out (but not earnings) without triggering any tax liability as contributions are made with after-tax dollars. Ask your tax preparer if that’s an option in your case as a number of rules apply.
To protect your retirement nest egg 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.