Can I Borrow From My IRA Without A Penalty?

    Though it can be tempting in times of need, borrowing from your IRA is a bad idea because of the danger of heavy tax penalties.

    The Individual Retirement Account (IRA) is a special type of account that is designed to help people save for their retirement. Money saved in an IRA isn’t taxed but you agree to some restriction for that privilege. One of those restrictions is that you cannot withdraw money from an IRA until you turn 59½ without paying a penalty.

    The other popular retirement account, the 401(k), offers savers the ability to take a loan from their 401(k) balance. You might ask yourself, “Can I borrow from my IRA,” but you cannot take an IRA loan or borrow against IRAs, even if you have more than enough money saved in the account.

    Can I Borrow From My IRA Without A Penalty?

    You cannot borrow from your IRA directly. The only way that you can do anything similar to borrowing from your IRA is by rolling it over to another IRA.

    You can get a check for the balance of your account and you have sixty days to deposit it in the new account.

    If you don’t, you cannot replace the money and must immediately pay income taxes and a ten percent penalty on the balance withdrawn. Even if you need the money, you should not do this due to the huge penalties you’ll incur if you are even a single day late in returning the money.

    If you are truly in a financial bind and need access to cash, you should consider some alternatives to playing with fire by using the IRA’s 60-day rollover period as a short-term loan.

    Here are some alternatives to borrowing from your IRA that you should consider.

    Don’t Borrow From IRA – Try These Borrowing Alternatives Instead

    Personal Loans

    One option for people in financial need is to take out a personal loan. Personal loans don’t require any collateral, just proof that you are able to make the monthly payments on the loan. The lack of collateral often means that you’ll pay a lot of interest, but it is generally preferable to trying to borrow from your retirement savings.

    Online personal loans providers such as Lending Club can give you a quick lending decision and offer loans as large as $50,000. If you think a personal loan can help in your situation, check out our personal loan comparison page.

    Home Equity Loans or HELOCs.

    If you own your home or have significant equity in your home, you can consider taking out a home equity loan or a home equity line of credit.

    Both are secured by your home, so you can get a much lower interest rate than you’d find on a personal loan.

    Home equity loans are best for one-time, large financial needs. You get a single lump sum of cash deposited in your account and will receive monthly bills until the loan is paid off.

    A HELOC is best if you have unpredictable expenses or cash flow on a regular basis. You can withdraw cash from the line of credit as you need it. When you make a withdrawal, you’ll be billed and you can choose to pay the minimum balance, pay the balance in full, or make a payment somewhere in between. Like a credit card, if you don’t pay the statement balance in full, you’ll incur an interest charge and get another bill next month. Once you’ve paid off the line of credit, you won’t be billed until you make another withdrawal.

    Refinancing Debt

    If your need for cash comes from bills that you cannot pay, consider finding a way to refinance your existed debts. Refinancing can combine your multiple payments into a single one. If you extend the duration of the loans or get a lower interest rate through refinancing it can also lower your minimum payments.

    You can refinance by using a personal loan or by taking advantage of a zero percent interest sign-up offer on a credit card. Many credit cards draw customers by offering a period of time after the account is opened, often twelve to eighteen months, where no interest will be charged so long as you meet the minimum payment each month.

    With high-interest loans, half or more of each payment you make can be going towards interest. Taking advantage of one of these deals can help you tackle the principal of your debt much more quickly.

    In nearly all situations, trying to borrow from your IRA is a bad idea. Consider other possibilities before taking such a drastic step.


    Photo credit: Pictures of Money (Flickr)

    About the Author

    TJ Porter graduated with a Bachelor of Science Degree in Business from Northeastern University in 2016. He has been sharing his financial expertise through his writing since 2014. He has in-depth experience in reviewing financial products such as savings accounts, credit cards, and brokerages, writing how-tos, and answering financial questions both simple and complicated. TJ has written for popular financial brands such as Credit Karma and My Bank Tracker. His aim is to provide actionable advice that can help readers better their financial lives. In his spare time, TJ enjoys esports, cooking, and board games.

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