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“Borrowing” Money from an IRA

Written by Nickel - 25 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.

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Published on September 12th, 2007 - 25 Comments
Filed under: Taxes

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

25 Responses to ““Borrowing” Money from an IRA”

1
jim Says:
September 12th, 2007 at 2:24 pm
Good thinking but it screams “bad idea” to me…
2
nickel Says:
September 12th, 2007 at 2:28 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.
3
ray Says:
September 12th, 2007 at 3:55 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?
4
nickel Says:
September 12th, 2007 at 5:22 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.
5
dong Says:
September 12th, 2007 at 9:26 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…
6
Melissa Says:
September 13th, 2007 at 8:36 am
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.
7
MoneyNing Says:
September 16th, 2007 at 9:44 pm
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.
8
Michael Says:
September 18th, 2007 at 7:28 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.
9
Lester Says:
January 19th, 2008 at 4:36 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?
10
Holger Says:
April 11th, 2008 at 2:14 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.
11
Mary Says:
April 25th, 2008 at 10:13 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?
12
Kathy Says:
June 24th, 2009 at 6:55 pm
we borrowed 20k from my IRA in Dec.2007 for a downpayment on a house. we paid it back January 2008. I didn’t claim the withdrawl on my 2007 taxes because we paid it back within 60 days. But I just received a letter from the IRS claiming we owe 10K in taxes and penalties because of this withdrawl. Is that because we took it out in one year and paid it back in another. Or are we okay since it was paid back within 60 days.
thank you.
13
Jan Says:
September 21st, 2009 at 4:36 pm
NEVER TAKE MONEY FROM AN IRA unless you are disabled and qualify for early withdrawl. The 60 day window is not worth the hassle from the IRS in paperwork proving you are within the time limit. If you need it that bad, take your lumps…10% penalty and taxes on ordinary income.
14
Evelyn Dyer Says:
October 7th, 2009 at 10:03 pm
My husband is retired and 65 ,years old, I am on social security disability. We would like to withdraw $17,000 from
our IRA account. Will we pay taxes on this? If so how much tax will we pay?
15
Jan Says:
October 8th, 2009 at 3:16 pm
IRA account holder can begin distribution at age 59 1/2 years old with no penalty however, there is a tax on withdrawls as ordinary income, in your case $17,000.00 because it was tax defered at the time of contribution to your IRA. If it is a ROTH IRA there is no tax on withdrawls since taxes were paid when you contributed. You should talk to your tax advisor to find out what tax bracket you are in.
16
karen Says:
January 4th, 2010 at 4:38 pm
I am 61 and on social security disability – my husband is 65 and on social security disability – I withdrew 36,00.00 from my IRA to pay off an equity line of credit – how much tax will I have to pay? My tax advisor told me before I withdrew the money that I would not have to pay too much tax because I was on disability -but after I withdrew the money and went to him to do a 1040 X form – he told me I was crazy for withdrwing the money because I will have to pay high taxes. He told me he did not advise me to take it out in the first place. I would not have taken it out if he told me not too. I think he is going senile.
17
renee cass Says:
April 27th, 2010 at 10:07 am
I just lost my job and I am in the process of rolling over my pension to an ira account to my bank…I just got my 1st unemployment check I really need just a little of it for house repairs…do I have to report it to unemployment…I didnt get a straight answer from the unemployment office I live in Illinois
18
Jack Says:
May 3rd, 2010 at 9:52 pm
Hello, I’ve read several of the posts going back a few years. I have a similar problem and I just need a little guidance. I cashed out about $16k in 2008 (from an IRA). I paid back half ($8k) within 60days, but I couldn’t pay the entire amount ($16k). The IRS came calling and wants taxes on the full $16k. I was well within my 60 day period to pay back the IRA….but, I only paid back half of what I borrowed. Can I submit this payment to the IRS as proof that I at least paid back 1/2 and request a recalculation on the tax penalty? Help!

JM
19
Lisa Says:
June 3rd, 2010 at 5:35 pm
In responce to it being acceptable to “borrow” from my IRA for 60 days without penalty, is that 60 business days or 60 calender days?
20
Steve Says:
June 18th, 2010 at 1:25 pm
Hello; I am buying into a business..The owner is fianancing all of it except for 50,000..I have some in my ira that I could put toward it..The bank wants collateral, but I do not want to put that much on my house, because I owe 3 more years..Please advise me on what to do.
21
MIke Says:
April 13th, 2011 at 2:16 pm
I would like to buy a home with the funds from my 401k, and place the home title as an asset back into the 401K the same as if I was pruchasing stock except this is a home
22
Theresa Says:
September 19th, 2011 at 8:24 pm
What if you are outside the 60 day window? I know you would have to pay tax and penalties, but would you be allowed to put the money back in or would it be subject then to your annual contribution cap? My mother has discussed possibly paying off our land contract to get the deed to my property into our name so that we could then lease our gas rights and get a large payout. If we did that, I could repay her IRA, pay the tax and penalties incurred, but I don’t want her to do it unless we can return the money to her IRA after the fact. I think it will take between 90 and 120 days for everything to go through and us to repay her money.
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