Can I Take Out a Loan Against My IRA?
Individual retirement accounts incentivize retirement savings with a variety of tax breaks. But, once you've contributed the money, the Internal Revenue Service penalizes early withdrawals to discourage using the money for anything besides retirement. Unlike employer plans, such as 401(k)s and 403(b)s, the Internal Revenue Service doesn't let you take loans from your IRAs.
You can't borrow from your IRA as you can from an employer-sponsored plan. In addition, the IRS also prohibits you from using your IRA as collateral to back a loan. Suppose a lender is considering making a loan to you, but wants collateral that it can seize if you don't pay the loan back. You can't pledge your IRA as a guarantee for the loan.
If you take a loan from your IRA or pledge it as security, you're engaging in what the IRS calls a "prohibited transaction." Generally, this means that the IRA stops being an IRA as of January 1 of the year the transaction occurs, and the entire IRA is considered distributed. If you pledge just a portion of the IRA as security, only that portion of the IRA is considered distributed. The distribution is taxable and, unless you're eligible to take qualified distributions, you're also hit with the 10 percent early withdrawal penalty.
There is a loophole that you can use to essentially take a very short-term loan from your IRA: a rollover. Rollovers are designed to let you move money from one IRA to another and give you 60 days from the time you take the money out to put it back into a qualified retirement account, including the same IRA. However, the IRS doesn't restrict how you can use the money in the meantime. So, if you just need money for a month, you could conceivably take a distribution, use it for 30 days, and then put it back.
If you attempt a rollover to use your IRA money for up to 60 days, don't miss the deadline. If you don't get it back before the deadline, it counts as a permanent distribution. In addition, you're not eligible to roll over any distribution from an IRA if you've done a rollover to or from that account within the past 12 months. For example, if you rolled money into the IRA on June 1, 2012, any distribution taken before June 1, 2013, wouldn't be eligible to be rolled over.
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."