Can I Take a Loan From a Traditional IRA?

The Internal Revenue Service makes it very clear that retirement accounts are for retirement. In exchange for favorable tax treatment, you have to abide by strict rules as to when and how you can access the money. Although you can't directly borrow from your traditional individual retirement arrangement, you may be able to get around this rule, depending on your circumstances and needs.

No IRA Loans

You cannot take a loan from an IRA -- the IRS doesn't allow it. In addition, the IRS forbids the use of funds in an IRA as collateral for a loan, even if you don't touch the account itself. This means that you can't offer your IRA assets to secure a loan in order to get approval or a lower interest rate.

401(k) Loans

If you are covered by a workplace plan that permits borrowing, you may be able to roll your IRA over into that plan and then take a loan from it. The IRS allows you to roll deductible traditional IRA contributions over to a "qualified workplace plan," which encompasses many types of plans, including 401(k) plans. You cannot roll a traditional IRA over into a Roth 401(k), however. Many 401(k) plans, in turn, allow you to borrow up to half the vested balance, or $50,000, whichever is less. Check with your workplace plan administrator to be sure that you can borrow from a rolled-over balance before you initiate the transfer.

Short-Term Rollover

Although the IRS does not allow you to borrow money from your traditional IRA, it allows you to roll over IRA funds and gives you 60 days in which to complete the rollover. This doesn’t help with long-term expenses, but it allows you to float money for a month or two, for example, to meet expenses until you receive a tax refund, bonus or pension payout. Note that the IRS requires the payer to withhold 20 percent of the taxable portion of a rollover distribution that it makes directly to you. After you take a tax-free rollover, you cannot complete another rollover using funds from either the origin or destination IRA for another year.

Risks

Both methods of borrowing from IRA funds carry risks. Workplace plans typically require you to repay the loan if you leave the company or are terminated, although this varies from plan to plan. Likewise, if you can’t complete a rollover within the 60-day period, the IRS will treat the withdrawn funds as a distribution. This means that you will have to pay taxes on the distribution as ordinary income, and you’ll owe an additional 10 percent penalty if you are younger than 59 1/2 and don't meet one of the few exceptions, which include disability, large medical expenses and first-home purchases.

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About the Author

Coral Fellows is currently a copy editor with Demand Media Studios.

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