What Type of Retirement Accounts Can You Borrow From?

Your retirement savings may be available for you to borrow against, and possibly at more competitive rates than what you would receive at the local bank. While borrowing from an IRA is prohibited, you may be able to use a provision of the law to take a short-term loan. A 401(k) plan is more likely to make a loan, but with certain restrictions, possibly including how you can use the money. In addition, you could face tax consequences if you lose your job.

IRA

An IRA account does not have provisions for loans. This is true for Roth and traditional IRA accounts. This restriction against IRA loans is established by law, and is not dependent on the trustee of the IRA.

IRA as Collateral

If you offer your IRA account as security for a loan, meaning the bank can take money from your account if you do not pay back a loan, the Internal Revenue Service will consider that a distribution of the entire account balance. Depending on the type of IRA, you may owe taxes and a 10 percent penalty on the balance of the account. You will also lose the benefit of any tax-free compounding of the IRA in the future.

401(k)

Many 401(k) plans offer loans — you may borrow up to one-half of your vested account balance, or $50,000, whichever is lower, at a low interest rate. You can generally have up to five years to repay the loan, although some employers will offer you up to 15 years to pay back a loan for a home purchase. Some companies also restrict the loans to certain purposes, such as medical bills or to prevent foreclosure. Your employer will deduct the loan payments from your paycheck, and deposit the principal and interest back into your account.

401(k) Loan Cautions

If you lose your job for any reason, payment on the balance of the 401(k) loan is due within 90 days of your termination. If you do not repay the loan, the outstanding balance is treated as a withdrawal, and you will owe income taxes on the money at your normal tax rate, as well as a 10 percent penalty if you are younger than 59-1/2.

IRA 60-Day Loan

You can withdraw money from an IRA, and replace the funds within 60 days without incurring any taxes or penalties, effectively taking a short-term interest-free loan. The 60-day time frame includes weekends and holidays, and no grace period is allowed. Replacement funds do not have to go back to the same IRA account.

IRA 60-Day Loan Cautions

If you do not replace a cash distribution from your IRA account within 60 days, you will owe any applicable taxes and penalties on the amount you withdraw. You can only take a 60-day distribution from an IRA once every 12 months. Additional distributions from the same account are immediately considered taxable distributions. If you deposited replacement funds into a different IRA, that account is also restricted from further distributions for 12 months.

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