If you raid your Roth IRA before you retire, you'll have to find another way to make up for the missing money. While borrowing from a Roth might seem like a way to get around depleting your retirement funds, it's not technically allowed. You can create a workaround to get the money from your Roth at least temporarily, but it's not an ideal loan vehicle.
The Internal Revenue Service forbids certain transactions in all types of individual retirement accounts, including Roth IRAs. Borrowing from an IRA or using it as security for a loan are both examples of prohibited transactions. The penalty for these violations is steep -- your IRA ceases to exist as a tax-advantaged account. Your entire account is considered by the IRS to have been distributed in the year you borrow from it. This rule makes all the earnings in your Roth immediately taxable, which is a significant penalty considering all distributions from your Roth would normally be tax-free upon retirement.
While you can't strictly borrow from your Roth, an IRS loophole allows you to take a 60-day loan from your Roth once per year. The IRS allows rollovers between retirement plans once per year. As long as you transfer the money within 60 days, you don't have to pay taxes or penalties on the rollover. Because the rules don't stipulate that you can't rollover money to the same account, you can take money out of your Roth, use it for 60 days, then return it to the account once per year. If you don't get the money back in time, the rollover becomes a distribution, possibly triggering taxes and penalties.
Withdrawal of Contributions
Unlike with traditional IRAs, contributions to a Roth can only be made with after-tax money. If you take money out of your Roth, your contributions come out tax-free, since they have already been taxed. According to IRS rules, your contributions come out first when you take money out of an IRA, rather than your earnings, so your first withdrawals will always be tax-free. If you made a Roth contribution for the current tax year, you can take that money back and return it to your Roth by tax-filing day without paying penalties or taxes. While not technically a loan, taking back contributions to redeposit later can give you the same result. As of 2012, you can make a penalty-free early withdrawal from a Roth IRA to pay for certain medical expenses that exceed 7.5 percent of your adjusted gross income, or up to $10,000 to buy your first home. However, you may have to pay regular income taxes on the part of the withdrawal that represents your investment gains, or earnings.
Even if your actions don't trigger taxes or penalties, you must report all IRA transactions to the IRS. You'll have to record the amount of your IRA withdrawal on line 15a of your Form 1040, even if you return the money within 60 days using the rollover rule. To avoid taxes, enter a taxable amount of zero on line 15b, noting that it was a rollover if this is the reason for your exemption. If your distribution ends up being taxable, you'll have to enter the correct taxable amount on line 15b.
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