Can You Borrow From an IRA for Medical Expenses?
Unlike employer-sponsored plans like 401(k)s and 403(b)s, individual retirement accounts never allow you to borrow money from them, even for emergency medical expenses. However, you might be able to access money for a short time, take a penalty-free distribution or, in some cases, even a tax-free distribution, from the account, depending on the type of IRA. Of course, if you're able to take qualified withdrawals from your IRA, you can just take a penalty-free distribution.
Attempted Loan Consequences
If you attempt to borrow money from your IRA, your account loses its status as an IRA as of the first day of the year and the entire balance is considered distributed. This means you'll have to pay taxes on it as if you distributed the entire account. If you try to use your IRA as collateral for a loan, the amount used as collateral is considered a distribution and becomes taxable that year. For example, say your IRA is worth $150,000 and you pledge $50,000 as security for a loan for your medical expenses. That $50,000 is considered distributed from the account.
If you only need the money for a month or two, a rollover might do the job. With a rollover, you have 60 days from the time that you take out the money to redeposit it in another qualified retirement account, including the IRA that you took the money from. As long as all the money gets put back in, you won't owe any taxes or penalties, but it will appear on your taxes. However, if you don't replace the money within 60 days, the IRS counts it as a permanent distribution.
Roth IRA Withdrawals
Qualified Roth IRA withdrawals come out tax-free, but require you to have the account for at least five years and to be 59 1/2 or permanently disabled. For traditional IRAs, the requirement is only that you're at least 59 1/2 years old. If you're taking a non-qualified withdrawal from a Roth IRA, you can get your contributions out tax-free and penalty-free at any time. For example, if you have $50,000 of contributions in your Roth IRA and it's worth $75,000, you can take out that $50,000 whenever you want, including to pay your medical expenses. Taxes and early withdrawal penalties only kick in when you start taking out earnings.
Medical Expenses Exception
If you do have a taxable early withdrawal, either from a traditional IRA or Roth IRA, you may be able to avoid some or all of the tax penalties if you take the money out to pay for medical expenses. The amount exempt from the penalty equals the amount by which your medical expenses exceed a threshold percentage of your adjusted gross income. In 2012, the threshold is 7.5 percent, but it goes up to 10 percent in 2013. For example, say your adjusted gross income is $44,000 in 2012 and you have $10,000 of medical expenses. The threshold is $3,300 -- 7.5 percent of $44,000 -- so you could take out up to $6,700 of taxable IRA early withdrawals without incurring the penalty.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."