Key Takeaway: While 401(k) loans are common, there’s no such thing as an IRA loan. You may still be able to withdraw money from your IRA without a penalty, but there are significant downsides to consider first.
You can’t borrow money from an IRA the way you can with some employer-sponsored retirement plans, like a 401(k) loan. Withdrawing money from your IRA is possible, but you may face taxes, penalties and lost retirement growth.
Before tapping into your retirement savings, it’s important to consider the long-term costs. When you withdraw money from an IRA, you lose out on compounding investment growth. And depending on your age and the type of account you have, you could also owe income taxes and have to pay a 10% early withdrawal penalty.
- Why aren’t IRA loans allowed?
- How can I access IRA funds?
- What are alternatives to borrowing from an IRA?
- FAQs about IRA loans
Why aren’t IRA loans allowed?
IRA loans aren’t allowed because the IRS treats IRAs differently than workplace retirement plans. While 401(k) plans may allow participants to take out a 401(k) loan and repay it over time, IRAs aren’t set up this way. Once you withdraw money from your IRA, it’s considered a distribution and subject to potential taxes and sometimes a 10% early-withdrawal penalty before age 59 1/2.
Can I borrow from my Roth IRA?
You can’t borrow money from your Roth IRA, though you can generally withdraw the money you’ve contributed without taxes or penalties since you’ve already paid taxes on those funds. But the investment earnings on your contributions are subject to income tax for the year you make your withdrawal.
If your withdrawal is considered a nonqualified distribution, you may owe income taxes, a 10% early withdrawal penalty or both. And even if a Roth IRA withdrawal is tax-free, taking money out will still reduce your retirement savings.
What’s an IRA loan versus a 401(k) loan?
IRA loans aren’t permitted, but some 401(k) plans allow participants to borrow from their account. If your employer’s plan permits it, you can borrow up to 50% of the vested amount or $50,000, whichever is less. If your vested balance is less than $10,000, you may borrow up to $10,000.
Your employer isn’t required to offer this option, and IRAs don’t have a comparable loan option.
How can I access IRA funds?
IRA loans aren’t available, but there are ways to access the money if you need it. Before taking money out of your retirement account, it’s important to understand the potential tax consequences, penalties and long-term impact on your retirement savings.
What is a 60-day IRA rollover?
A 60-day rollover lets you take temporary possession of IRA funds, and some people think of it as a short-term IRA loan workaround. This transaction is known as an indirect rollover, and it allows you to withdraw funds from your IRA and personally receive the money. From there, you have 60 days to redeposit the full amount into an eligible retirement account.
Missing the deadline or failing to redeposit the full amount could result in income taxes and an early withdrawal penalty (excluding qualified Roth distributions and amounts already taxed).
And regardless of how many IRAs you own, you’re limited to one indirect rollover every 12 months.
How does a traditional IRA withdrawal work?
You can withdraw money from a traditional IRA at any time, but the distributions may be taxable and subject to early withdrawal penalties. But the IRS does offer the following exceptions to the 10% early withdrawal penalty:
- You’re using the funds for qualified higher education expenses.
- You’re using up to $10,000 for a first-time home purchase.
- You experienced total and permanent disability.
- The funds are used for unreimbursed medical expenses above 7.5% of your adjusted gross income, or AGI.
- The money is used to pay for health insurance premiums while you’re unemployed.
How does a Roth IRA withdrawal work?
You can generally withdraw your Roth IRA contributions at any time without taxes or penalties, but different rules apply to your investment earnings. Your earnings may be taxable the year you take the distribution.
What are alternatives to borrowing from an IRA?
If you need cash, there are several alternatives to withdrawing money from your IRA. The best option depends on how much you need and your ability to repay the borrowed funds.
- Personal loans — An unsecured personal loan allows you to borrow a lump sum amount and repay it in monthly installments. Personal loans come with a wide range of loan amounts and repayment terms, and your interest rate is influenced by your credit.
- 401(k) loans — Some 401(k) plans allow you to take out a loan against your account balance. But if you don’t repay the loan according to its terms, including interest, the unpaid amount is considered a plan distribution. That means you could face income taxes and a withdrawal penalty.
- Credit card or balance transfer card — If you only need to access a small amount of money, using a credit card may be an option. If your credit is strong, you may qualify for a balance transfer card with a 0% introductory APR. That gives you time to pay down your credit card balance without accruing any additional interest. But keep in mind you’ll usually pay a balance transfer fee on the amount transferred.
- Home equity loan or HELOC — If you’ve built up substantial equity in your home, you can consider taking out a home equity loan or home equity line of credit (HELOC). A home equity loan provides a lump sum amount with fixed monthly repayments, while a HELOC is a revolving line of credit you can borrow from as needed. But because your home serves as collateral for the loan, failing to repay it could put your home at risk of foreclosure.
- Bill negotiation and hardship plans — If you’re struggling to cover a specific expense, you may not need to borrow any money. Many lenders and providers offer hardship programs or temporary relief for eligible customers. For example, negotiating directly with your creditors could reduce your monthly payments or give you more time to pay.
Next steps
Before withdrawing money from your IRA, take some time to evaluate your options and consider the following questions:
- How much cash do I actually need?
- How quickly do I need access to the money?
- Can I comfortably repay a loan?
- What taxes or penalties could apply?
- How much retirement growth could I lose?
- Have I talked to a tax or financial professional?
FAQs about IRA loans
No, you can’t use your IRA as collateral for a loan. According to IRS rules, pledging any part of your IRA as loan collateral will cause that amount to be treated as a distribution. That means you could owe income taxes and an early withdrawal penalty on the full amount.
A 60-day IRA rollover allows you to withdraw money from an IRA and avoid any taxes or penalties if you redeposit the funds into an eligible IRA within 60 days. You’re limited to one indirect rollover per year, and missing the deadline can cause the withdrawal to become taxable.
It depends on your financial situation, but a personal loan could be the better choice if it helps you avoid taxes, penalties and reduced retirement savings. However, it’s important to compare the costs of each option before deciding.
IRA loans aren’t allowed, so you can’t borrow money from your IRA to buy a house, but you may be able to withdraw money instead. The IRS offers an exception to the early withdrawal penalty for up to $10,000 if you’re a qualified first-time homebuyer using the funds for a home purchase.
No, the IRS doesn’t allow for IRA loans. Taking money from your IRA usually requires you to make a withdrawal, which could trigger taxes or penalties. Before accessing your IRA funds, compare the costs with other financing options.
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