How to Borrow Against a Retirement Account

Over time, you might accumulate a sizable nest egg in retirement funds that you wish to use before retirement. In most cases, withdrawals from your retirement plans result in taxes and penalties if you are younger than age 59 1/2, but you might be able to borrow the money from your account. The Internal Revenue Service prohibits people from taking loans from their individual retirement accounts, but you can use money from the account for 60 days as a form of tax and interest free loan. Conversely, 401(k) plans are more likely to offer conventional loans, allowing you to repay the borrowed funds monthly.

Employer Plan

Step 1

Determine if your 401(k) or other employer plan has funds available for the loan you desire. According to IRS regulations, you can usually borrow up to half of the value of your 401(k), up to $50,000, but your employer might impose other limits.

Step 2

Review your plan for allowable loan purposes. IRS law does not restrict the uses for 401(k) loan proceeds, but some employers only allow loans for specific purposes, such as to pay medical expenses or past-due property taxes. Your human resources department should be able to give you the details of your specific plan.

Step 3

Complete the loan application. Most 401(k) loans are simple and don't require a credit check because the funds in the plan secure the loan. Specify the repayment period you would like when you borrow the money. You usually have up to five years to repay but might have up to 15 years if the loan is for a home purchase.

IRA

Step 1

Request a distribution from your IRA custodian. It will advance you the funds as requested. You may need to complete a form from your custodian detailing your request. If the custodian asks for a reason for the disbursement, specify it is for a tax-free rollover.

Step 2

Deposit the funds that you withdrew from your IRA back into the same IRA account or another IRA account that is the same type within 60 days. For example, if you withdrew the funds from a traditional IRA, you must redeposit them into either the same account or another traditional IRA account.

Step 3

Claim the distribution as a tax-free distribution on your income tax return. On Form 1040, enter the total amount that you withdrew on line 15a, and the taxable amount of zero on line 15b. If you file form 1040A, use lines 11a and 11b. Keep your Form 1099-R and records showing that you deposited the money back into an IRA within 60 days to satisfy any IRS audit requirements.

Tip

  • If your spouse has an IRA, you can double the term of the 60 day loan by redepositing funds into your IRA by making a tax-free rollover withdrawal from your spouse's IRA. You then have 60 additional days to replace the money in your spouse's account.

Warning

  • If you exceed the 60-day time-frame to redeposit funds in an IRA, the money is treated as a regular distribution, and you could owe taxes and penalties. An IRA can only be involved in a tax-free rollover once in a 12 month time frame. This includes the account that you withdrew the money from as well as the account you redeposit the money into. If you lose your job and have an outstanding 401(k) loan, the loan balance is treated as a withdrawal and subject to taxes and penalties, unless you repay the loan.

About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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