Individual Retirement Accounts (IRAs) offer account holders several tax advantages, such as tax credits, tax deductions, and tax-deferred growth. However, when money is withdrawn from a Traditional IRA, the distribution is fully taxable as income.
Depending on the account holder’s age, withdrawals may also be subject to the IRS premature withdrawal penalty of 10%. However, there are special circumstances that allow early withdrawals from a traditional IRA and Roth IRA without penalty. Anyone can avoid taxation and the IRS penalty for funds withdrawn from a Traditional IRA if the full amount is repaid within 60 days.
Key Takeaways
- Withdrawals from IRAs are taxable and may be subject to an IRS premature penalty for those under age 59 ½.
- IRA rollovers are not subject to taxation or IRS penalties for early withdrawals under certain circumstances.
- To avoid penalties and taxation, the account holder must roll over funds to another qualified account or back into their IRA within 60 days from the date of the distribution.
- Failure to repay or roll over funds within 60 days results in the distribution becoming taxable, and it may also be subject to an IRS penalty.
- Loans from an IRA account are not allowed.
How to Borrow from an IRA – The 60-Day Rule
Although loans are not allowed from an IRA, there is a workaround with the 60-day rule. The IRS allows tax-free rollovers from an IRA to another retirement plan, to a different IRA, or back into the same account within 60 days from the date of distribution without triggering the premature penalty. Funds can either be transferred from one custodian to another, or from the custodian to the account holder, who then must deposit the funds into a retirement account or IRA.
IRA account holders who receive the funds must roll over the proceeds within 60 days to avoid taxation and a penalty. The proceeds are available for use during the 60-day period, by the account holder. Although not an IRA loan, the 60-day period enables the account owner to access the IRA funds and use them for any purpose.
The IRS may waive the 60-day limit under certain circumstances, such as:
- You receive an automatic waiver if you followed the transfer guidelines and the financial institution acknowledges missing the 60-day window.
- You receive a private letter acknowledging the waiver from the IRS.
- You self-certified that you met the rollover guidelines and the IRS grants the waiver.
If deposited beyond the 60 days, the entire distribution becomes taxable and may be subject to the 10% IRS premature withdrawal penalty for account holders under age 59 1/2.
The IRS restricts certain IRA withdrawals from being redeposited or rolled over. These include:
Rolling Over Funds Instead of Borrowing From an IRA
IRAs do not allow account owners to borrow funds. Instead, they can withdraw or rollover funds to another qualified account or IRA, or redeposit into the same IRA. The closest method to borrowing money from an IRA is to withdraw funds and then redeposit it back into the same account within 60 days. Doing so, however, comes with risks and rules.
This is technically not a “loan,” but a provision that allows temporary use of IRA savings outside of your IRA. This is by definition, a “distribution” and a “rollover” of the distributed amount.
- Generally, you can perform an IRA-to-IRA rollover only once every 12 months. As of January 1, 2015, the tax court ruled that all of your traditional IRAs are treated as one IRA for this purpose.
- The assets you withdraw must be the same assets that you roll over to your IRA. For instance, if you withdraw cash, you must rollover cash.
- Only eligible amounts can be rolled over.
- Withdrawal charges may be deducted by the custodian. IRAs can be held in different types of accounts, such as annuities, which may have a withdrawal charge schedule.
- If a portion of the withdrawal is rolled over, the difference (the amount not rolled over) is taxable as income and might be subject to an early-withdrawal penalty.
Taxes and Fees
If considering the question, “can I take a loan from my IRA?” understand that the 60-day rule enables you to use the withdrawn IRA funds as a substitute for a short-term loan, but there may be fees.
Rollovers and transfers of qualified funds are non-taxable and are not subject to IRS penalties. However, the rollover becomes taxable if the funds are not placed back into the same account or another qualified account within 60 days.
If the rollover amount does not equal the amount of the original distribution, the difference is taxable as income and may be subject to an early withdrawal penalty. For example, a 57-year-old IRA account holder withdraws $5,000 but only rolls over $4,000 into an IRA within 60 days. The difference of $1,000 is taxable and subject to a 10% IRS penalty.
Withdrawals may also be subject to charges or penalty fees from the custodian. For example, annuities are retirement accounts that often have withdrawal charge schedules that typically range from 7 to 10 years. Charges typically decrease annually.
Consider an IRA annuity owner withdrawing funds in the first contract year. They will likely have a higher charge than an account holder withdrawing funds in their tenth contract year. Someone withdrawing funds outside of the surrender period will not incur charges.
Also, some custodians charge a flat fee for all withdrawals regardless of how long you’ve had the account. It’s important to understand the rules, provisions, and potential fees of the IRA account before requesting withdrawals, even if the money is repaid within the rollover time frame.
Important
If you’re planning to withdraw and then redeposit or rollover your IRA funds within the 60-day period, ensure you fully understand any fees and penalties that your IRA account provider may impose.
Penalty-Free IRA Withdrawals
You don’t need to borrow from your IRA if you’re eligible for a penalty-free withdrawal. The Following are most of the categories of penalty-free IRA distributions:
- If you are over the age of 59 ½
- Up to $5,000 for qualified birth or adoption expenses
- Total and permanent disability of IRA owner
- Up to $22,000 after a federally declared disaster in your area
- Up to the lesser of $10,000 or 50% of account value after domestic abuse
- For qualified higher education expenses
- Annual limit of $1,000 for a family emergency
- Qualified first-time homebuyer – up to $10,000
Failure to Redeposit Money
The IRS allows 60 days for the withdrawn funds to be rolled over into a qualified retirement account or IRA. Under certain circumstances, the deadline can be waived. If funds are not rolled over or redeposited within 60 days and the account holder does not qualify for the waiver, the distribution becomes taxable as income and may be subject to the IRS penalty of 10%.
There is no limit to the amount that can be rolled over from an IRA.
If the money is not redeposited, it will be considered a taxable withdrawal, not a rollover. As a result, the one rollover per year limit has not been met, thus allowing the IRA owner another opportunity to withdraw and rollover funds.
Frequently Asked Questions (FAQs)
How Much Can You Borrow From an IRA Without Penalty?
IRAs do not allow direct loans. However, funds withdrawn and repaid into the original IRA account or another IRA within 60 days avoid the IRS penalty. There is no limit to the amount of money you can withdraw from your IRA during the 60-day period. Although not called an IRA loan, you can borrow from your IRA for 60 days without penalty as long as the money is re-deposited within that window.
Note that the IRS allows only one rollover every 12 months.
Can You Borrow From Your IRA to Buy a House?
Loans from an IRA are not allowed. Better than borrowing from an IRA, qualified first-time homebuyers can withdraw up to $10,000 from their IRA without penalty. Although, the withdrawal is taxable.
Home buyers are eligible for additional IRA withdrawals, as long as the funds are redeposited within 60 days. If you can repay the full amount within 60 days, you can avoid taxes and an IRS penalty.
Can You Borrow From a Roth IRA?
The IRS does not permit loans from Roth IRAs. Yet, there are other ways to withdraw from your Roth IRA.
If the account owner is over age 59 ½ and the account is at least five years old, you don’t need a Roth IRA loan as all contributions can be withdrawn tax and penalty-free.
You may be eligible to withdraw from your Roth IRA, tax and penalty-free, if you fall into one of the following categories:
- Qualified first time homebuyers may withdraw up to $10,000 for a home down payment
- If you become disabled
Another workaround to access a short-term Roth IRA loan is the 60-day rule. The IRS allows tax-free rollovers from a Roth IRA to another Roth IRA retirement plan, or back into the same IRA within 60 days from the date of distribution without triggering taxes or penalties.
Can You Borrow From a SIMPLE or SEP-IRA?
Like traditional and Roth IRAs, loans from SIMPLE and SEP-IRAs are not allowed. Money can be withdrawn or rolled over. If the withdrawn funds are redeposited in the same account or a similar retirement account within 60 days, no penalties or taxes will be imposed.
SEP IRAs are governed by the same rules as traditional IRAs. Within the first two years, the IRS only allows rollovers from SIMPLE IRAs to SIMPLE IRAs. During the first two years after the SIMPLE-IRA is opened, any money withdrawn, including a rollover into a non-SIMPLE account, is subject to a 25% penalty. Akin to other IRAs, only one rollover is allowed per 12 months for both SEP and SIMPLE IRAs.
Can You Borrow From a 401k?
Most 401k plans allow loans. Each plan has specific rules for the 401k loan. Although you might be able to borrow from a 401k, you will need to understand the disadvantages:
- If you fail to repay the loan, including interest, in accordance with the 401k plan’s rules, the unpaid amounts become a distribution. This means that if you’re under age 59 ½, you’ll need to pay a 10% penalty and taxes.
- If you leave your job before the loan is paid off, you may need to repay the loan in full at the time of your departure.
- Any unpaid loan means you’ll have less money available for your retirement.
The Bottom Line
An IRA is a tax-advantaged retirement account with special provisions for rolling over funds. These rules apply to those under age 59 ½.
While not officially recognized as an IRA loan, you are allowed to borrow from your IRA for 60 days, without paying income taxes or the 10% early withdrawal penalty. The 60-day rollover rule gives you a window to access your IRA account, as long as all amounts withdrawn are re-deposited into a qualified retirement account, another IRA, or back into the same IRA within 60 days.
There are additional provisions for penalty-free IRA withdrawals, under specific circumstances. You may still incur penalties and fees from your IRA provider. Carefully consider all the risks and benefits before taking funds out of your IRA.