“Borrowing” Money from an IRA

Written by nickel - 11 Comments

Have you ever thought of borrowing money from your IRA? While 401(k) plans typically have loan provisions, there are no such provisions when it comes to IRAs. That being said, it is possible to take a short-term loan from your IRA without exposing yourself to taxes or penalties…

As it turns out, you can withdraw funds from your IRA for 60 days without running into any tax-related issues. This 60 day window is actually intended to allow investors to roll their account over from one IRA custodian to another. However, there’s nothing in the IRS regulations that says you have to put the funds into a new account — after all, you could change your mind before completing the rollover and decide to put the money back where it came from. Hence, you could actually pull money from your IRA, use it to bridge a short-term rough patch, and then stick the money back in before the 60 day window is up. No fuss, no muss.

A few things to keep in mind before you decide to do something like this… First, you can only do this once within a one-year period for each IRA. Second, it’s possible that the IRA custodian will want to withhold funds from your withdrawal. Unfortunately, you won’t be able to get these withheld funds back until you file your taxes, yet you’ll still have to put the full amount back into your IRA before the end of 60 days. If not, you’ll face have to pay taxes (if applicable) and a 10% penalty on the shortfall.

Finally, I’m not saying that this is a good idea. Rather, I’m just putting it out there as a possible source of short-term funds. Remember, once the money has been out for 60 days, it’ll be subject to taxes and/or a 10% penalty. Moreover, the only way to build your IRA back up at that point will be via regular contributions, which are subject to strict annual limits.

Published on September 12th, 2007 - 11 Comments
Filed under: Taxes
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Comments (scroll down to add your own):

Good thinking but it screams “bad idea” to me…
Comment by jim — Sep 12th 2007 @ 2:24 pm
Like I said, I’m not suggesting that this is a good idea. I’m just saying that it’s possible. Depending on the circumstances, however, something like might be a far better strategy for bridging a rough patch than something like a payday loan or credit card cash advance.

Comment by nickel — Sep 12th 2007 @ 2:28 pm
LET’S SAY YOU WITHDRAW 100,000 DOLLARS FROM AN EXISTING $200,000 IRA AND PUT THE $100,000 IN ANOTHER IRA. WOULD THAT BE POSSIBLE?
Comment by ray — Sep 12th 2007 @ 3:55 pm
ray: Assuming that you follow the rules, what you describe is nothing more than a rollover, which is exactly what the 60 day window was put into place for in the first place.

Comment by nickel — Sep 12th 2007 @ 5:22 pm
It can definitely make sense in certain circumstances. I just hate playing in the 60 day window. Just a straight rollover makes me nervous sometimes…
Comment by dong — Sep 12th 2007 @ 9:26 pm
My husband and I did this one time. We needed the money to bid on a house, then we got the loan for the house and put it all back.
Comment by Melissa — Sep 13th 2007 @ 8:36 am
This is usually not a good idea since most people will probably abuse it! If you really have to borrow, remember that you should pay it back as soon as possible.
Comment by MoneyNing — Sep 16th 2007 @ 9:44 pm
Interesting. I’ve been using my Roth IRA as a holding place for $10,000 of my house downpayment. I’d been concerned about losing what amounts to 2.5 years of contributions, but it seems like I may not have to lose it. As long as I get enough money back from the loan (or somehow manage to have free cash flow after buying a house) I can put the money back without having it “hit” my contribution cap for the year.
Comment by Michael — Sep 18th 2007 @ 7:28 pm
I did this in 2007 as a short-term loan $20k and payed it all back within 60 days. However, I still received a 1099-R with distribution code 1 (early distribution) and Taxable Amount Not Determined box checked. I think I’m going to be struggling to get this fixed or pay taxes & penalties. And if I do pay taxes my money is back in the IRA so I didn’t even get to use it. Yes, bad idea!

Do you know the reporting requirements, if any, on a withdrawl put back in time?
Comment by Lester — Jan 19th 2008 @ 4:36 pm
If you missed the 60 day window but you have the funds you withdrew from the IRA account, would you be able to return the money and not be penalized? Any advise would be appreciated.
Comment by Holger — Apr 11th 2008 @ 2:14 pm
We want to take out $150K from our $190K IRA to buy a bank owned property for cash that is not mortgageable because lenders consider it to be uninhabitable until repairs are made, but our financial advisor discouraged us from doing this and told us we would not be able to get that much out. Is there a limit to how much you can take? And is there an IRS regulation I can quote to him?
Comment by Mary — Apr 25th 2008 @ 10:13 pm