How can you borrow from a Roth IRA?
You can take out the principal portion, or contributions, made to the Roth, but gains become tricky. If you take out gains under the age of 59 1/2, there will be a 10% penalty as well as tax. If over 59 1/2, you only avoid the 10% penalty, not the tax on the gains. There are very few limited exceptions or "qualified distributions" that avoid the 10% penalty under the age of 59 1/2, but you must have had the Roth IRA for at least 5 years.
The only other options is to do a "60 day rollover" where you take the money out with the intention of putting the money back in within 60 DAYS! This is a hard number deadline and is only to be used when you believe you can put the money back within 60 days. If you don't, the rules above apply.
Hope this helps. Dan Stewart CFA®
Although this question has been answered multiple times...let me take a different angle.
The premise of your question leads me to believe that you would like to "borrow" instead of "withdraw" from you Roth IRA. Since you can't do this directly, let's see about how you can eventually get there.
First, if you have a small business or even a side business, you could set up a retirement plan for the business. A solo 401(k) is what many people establish for themselves as long as there weren't any employees besides yourself and/or your spouse. Next, instead of choosing the traditional solo 401(k), you would choose a Roth solo 401(k). Once that plan is established with the proper language, you would be able to roll your current Roth into the new Roth solo 401(k) plan. Once the money is in the plan and your plan allows for loans for its employees, you would be able to borrow 50% of the account balance up to $50,000.
So while technically correct that you can't borrow from your Roth IRA, you can still accomplish the same thing with a little work around.
Technically, you can’t borrow money from a Roth IRA, at least not like you would from a traditional loan, but there are other options. The IRS does allow you to withdraw money from your Roth IRA, but you might have to pay a penalty. There is a way to work around the IRS’s requirements if you only need to borrow money for a short period of time by rolling over the money that’s in your account. With both options, you'll need to visit the financial institution that handles your Roth IRA and fill out the proper paperwork in order to get your money.
According to the IRS, you can withdraw — tax free — some or all of the money in your Roth IRA as long as you invest the money back into the same Roth IRA or into a traditional IRA within 60 days. This is called a Roth IRA rollover. If you can't repay the full amount within 60 days, you do have the option to repay a partial amount. However, you'll have to pay a 10% penalty on the portion of the money that you keep, and there is a one-year waiting period between rollovers. The waiting period begins when you receive your distribution — not when you pay the money back.
If you need to use the money in your Roth IRA and won’t have the funds to repay it within 60 days, you can make an early withdrawal. As of 2014, most early withdrawals are subject to a 10% penalty. However, if you request a qualified distribution you can withdraw money from your Roth IRA without paying the 10% penalty if it’s been more than five years since you set up and contributed to your Roth IRA, including:
• The distribution is being used to buy or build your first home
• You’re at least 59.5 years old at the time of the distribution
• If you’re making an early withdraw because you've recently become disabled
Loans are not allowed from IRAs or from IRA-based plans such as SEPs, SARSEPs and SIMPLE IRA plans. Loans are allowed from qualified plans that satisfy the requirements of 401(a), from annuity plans that satisfy the requirements of 403(a)s or 403(b)s, and from governmental plans.
That said, with a Roth IRA, the principal amount may be withdrawn without any tax consequence because you have already paid taxes on those funds. You may borrow the principle from a Roth IRA although the appreciation is different. The amount that your IRA has appreciated is not available for withdrawal without paying certain types of taxes and fees.
Keep in mind, there is an instance where you may not directly withdraw the original investment from a Roth IRA. In this scenario, if you have converted the funds over from your traditional IRA into a Roth IRA, the amount converted over may not be available for a penalty free withdraw for five years.
As always, please refer to your CPA before making any personal tax decisions.
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®