How to Borrow Against a 401(k) or IRA

by Mark Kennan

    Money you put in your retirement plan isn't intended to serve as a slush fund whenever you need some extra dough. So, the Internal Revenue Service has a number of rules about how you can borrow money and how much you can take out. Depending on the type of plan you have, your options for borrowing from the plan might be very limitedor even non-existent.

    IRAs Prohibit Loans

    The rules for individual retirement accounts don't allow you to borrow money from the account or use the IRA as collateral. For example, you couldn't go to the bank and offer to use your IRA as security for a personal loan. However, you can get around this rule to use your money for up to 60 days if needed with a rollover. A rollover gives you a 60-day window from the time you take the money out until you have to put the money back in -- and you can use the money however you want during that period.

    IRA Warnings

    If you miss the 60-day deadline for rolling over your money to a new retirement account , you're stuck with a permanent withdrawal. For example, say you took out $15,000 to buy a new car thinking that you would have your year-end bonus of $25,000 in 45 days. If the bonus doesn't come through and you can't find other funds to redeposit in your IRA, you're stuck with a $15,000 distribution, on which you will have to pay income taxes and possibly a 10 percent penalty if you are under age 59 1/2. In addition, you're limited to one rollover per IRA per year. So, if you only have one IRA, you must wait at least 12 months from the time you take the rollover distribution.

    401(k) Loan Basics

    Your 401(k) plan can offer loans, but it isn't required to make them available. So, if your plan doesn't offer them, you're unfortunately out of luck. If your 401(k) does, you can borrow up to $50,000 or half of your vested account balance, whichever is smaller. For example, if your vested balance is $80,000, you can only borrow $40,000. To request a loan, talk to your 401(k) plan administrator -- all that's usually required is a loan request form. If you're married, your 401(k) might require that your spouse sign off before disbursing the money to you. You'll pay interest on the money, but the money goes back into your 401(k) plan, and there are no taxes due or penalties to be paid.

    401(k) Loan Repayments

    Typically, your company has you repay the 401(k) loan through withholding from your paycheck. Loans are repaid over five years, unless you're borrowing to buy a home. If so, you can use a longer repayment period. If you lose your job, you must repay the money you borrowed immediately. If you don't repay your loan on time, the remaining balance is treated as a permanent distribution. And, if you're under 59 1/2, you'll owe an extra 10 percent tax penalty on top of income taxes.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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