If you need money, you may be tempted to borrow from your IRA, as it may be one of your most valuable assets. Unfortunately, you cannot take out a loan from an IRA. However, there are a few similar things you can do if you are in dire need of cash.
When Can You Borrow from Your IRA?
The IRS rules dictate what you can do with IRAs, and these rules only allow for distributions from IRAs. These distributions involve withdrawing money from the retirement account without returning it quickly or rolling it directly into another retirement account. Typically, this action is irreversible.
Alternatives to Borrowing from Your IRA
Since you cannot borrow from your IRA, there are alternatives worth evaluating depending on your needs and reason for the loan:
60-Day Rollover:
You may be able to utilize your IRA assets for a short period by using a 60-day rollover. You must follow strict IRS rules, but this technique is similar to a short-term IRA loan. Note that since 2015, the IRS has limited the number of times you can do this to once every 12 months, so you should review the rules if you haven’t done this in a while.
Other Retirement Plans:
You may have the option to borrow from balances in workplace retirement plans like 401(k) plans. Your specific plan must allow for loans, and there are several risks involved when borrowing. In addition to withdrawing your own money, you’ll have to pay taxes and possibly penalties if you are unable to repay the loan. Consider what happens if you change jobs before the loan is fully repaid.
Roth IRA Accounts:
Roth IRAs may be able to provide the funds you need, but you will be sacrificing ground in your retirement goals. With a Roth, you may be able to withdraw your contributions without triggering any tax liability. Ask your tax advisor if this is an option in your case.
Look Elsewhere:
To protect your retirement and reduce tax complications, it may be better to borrow from elsewhere. An unsecured loan (where you don’t pledge anything as collateral) may be all you need. These loans are available from peer-to-peer lending services, family members, banks, or credit unions.
Investing in a Business
If you want to use your IRA assets to invest in a business, you may be able to do that, but it is not easy.
Instead of borrowing from your IRA, you can create an entity and fund it with the savings in your IRA, using that entity to purchase a stake in the business. This usually involves setting up what is called a “self-directed IRA,” which is used to invest in real estate. The IRS has strict rules regarding the types of allowed investments, and it is important to consult a financial advisor before pursuing this option.
You will need to work with a company that specializes in using IRAs to invest in businesses or real estate. If you go this route, expect to pay fees to set things up. You will also have to pay annual fees.
If you use your IRA to invest in a business, you risk losing both your income and your savings. As an alternative, you may qualify for business loans backed by the U.S. Small Business Administration. The government backing makes it easier to qualify for loans and keeps borrowing costs low.
Frequently Asked Questions (FAQs)
Why Can’t I Borrow from My IRA?
IRAs were created to enable people to save money for retirement. By saving this money in an IRA account, you receive tax benefits. If you withdraw money from your IRA account, you lose those tax advantages, even if you plan to replace it later.
Can
Is it better to borrow from an IRA or a 401(k)?
If you really want to borrow from your retirement funds instead of withdrawing them and replacing them later, you can do so using a 401(k) if you have one. There are strict rules about the amount you can borrow and when it must be repaid. Check with your 401(k) administrator for details.
Can I take a short-term loan from my IRA?
Although it’s not a loan in the technical sense, you can use the 60-day rollover exemption once every 12 months to withdraw money from your IRA account as long as you put that money back within 60 days.
Thank you for your feedback!
Sources:
IRS. “Retirement Plans FAQs Regarding Loans.”
IRS. “Considering a Loan From Your 401(k) Plan?”
Legal Information Institute. “26 U.S. Code § 408. Individual Retirement Accounts.”
IRS. “Rollovers of Retirement Plan and IRA Distributions.”
IRS. “Topic No. 309 Roth IRA Contributions.”
IRS. “More in Retirement Plans.”
SBA. “The SBA Helps Small Businesses Get Loans.”
Source: https://www.thebalancemoney.com/ira-loan-options-315561
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