Retirement accounts such as 401(k)s, Traditional IRAs, Roth IRAs, and self-directed IRAs are meant to provide financial support in your later years, but what if you need access to funds prior?  In many cases, withdrawing too soon from your retirement account will trigger taxes and penalties, but what if you only need funds for a limited time? Is borrowing against IRA funds an option?

There’s no direct way to take a loan against your IRA, but understanding withdrawal rules can help you determine if tapping into your IRA is an option and, if so, how you can do so without penalty.

Using Your IRA Wisely? Explore options for penalty-free withdrawals.

Can You Borrow Against An IRA Without Penalty?

Generally speaking, you cannot borrow against your IRA without penalty. Taking a loan from your IRA is considered a prohibited transaction. Engaging in prohibited transactions can have significant tax penalties. Namely, the IRS will consider the funds distributed as part of your income and tax it accordingly.

If you need to borrow from your IRA, you may be able to do so without penalty if you:

  • Are 59 ½ years old or older.
  • Have a Roth IRA that is 5 years or older and are withdrawing from contributions.
  • Are eligible for an early-withdrawal exception, such as for purchasing your first home, paying for educational expenses, or if you become disabled.
  • Intend to roll funds from one IRA to another within 60 days via indirect rollover.

Annual IRA contributions are relatively low compared to other types of retirement accounts, with the maximum contribution equal to $7,000 annually ($8,000 if you are 50 or older). Any contributions that exceed that limit will trigger a penalty.

When you invest in tax liens, earnings come from the interest applied to the lien

What is the 60-day rollover rule?

The 60-day rollover rule allows you to move funds from one IRA to another without incurring taxes or penalties. In this case, you take possession of the funds from one IRA and have 60 days to deposit them into another IRA. If you fail to deposit the funds within 60 days, the funds are considered a distribution and you will be taxed and potentially penalized if you are under 59.5.

This rollover method is in contrast to the direct rollover method, which moves funds directly from one IRA to another (i.e., you never take possession of the funds).

How does the 60-day rollover rule work for borrowing from an IRA?

The 60-day rollover rule can be beneficial if you need to take out a short-term loan and can pay back the funds within 60 days or less. To use this method, you withdraw funds from the IRA and then deposit them back into the IRA within the allotted time frame.

As such, this can act as an interest-free loan with little paperwork. However, it’s not without risks. If you do not redeposit the funds within 60 days, they will be considered taxable income.  And, if you’re under 59 ½ years old, the funds are considered an early withdrawal subject to a 10% penalty.

Need Funds Early? Learn how to access your IRA without penalties.

Can I use my IRA as collateral for a loan?

No, you cannot use your IRA as collateral for a loan. The IRS considered this a form of self-dealing and, therefore, a prohibited transaction.

What are the consequences of using an IRA as collateral?

If you use your IRA as collateral, the IRS will consider it a prohibited transaction. The funds will be treated as a distribution and be subject to income tax. If you are under 59 ½ years old, you’ll incur an additional 10% penalty.

Further, because using a loan for collateral is prohibited, the account may lose IRA status and any associated tax benefits.

What are prohibited transactions with an IRA?

Prohibited transactions are generally those considered to be self-dealing or the result of engaging in a disqualified person. Disqualified persons include the account owner as well as their spouse, ascendants, and descendants. The term also refers to the account fiduciary and anyone who provides services to the account, such as a financial advisor.

Examples of prohibited transactions include:

  • Living or vacationing in a property held in the IRA.
  • Selling property to the IRA.
  • Taking a loan against the IRA or using it as collateral.
  • Investing in a business owned by a disqualified person.

What are the exceptions to the early withdrawal penalty from an IRA?

The IRS allows IRA holders to access funds early without penalty under certain circumstances. IRS early withdrawal exceptions include but are not limited to:

  • The birth or adoption of a child.
  • The death of the account holder.
  • Diagnosis of a terminal illness or a permanent and total disability diagnosis.
  • Economic loss caused by a federally declared natural disaster.
  • Qualified higher education expenses.
  • Personal or family emergency expenses.
  • The purchase of your first home.
  • Payment of unreimbursed medical expenses.
  • Payment of health insurance premiums if unemployed.
  • When an active military reservist is called to duty.
  • Withdrawal is made to correct contributions that exceeded your annual limit.

Each exception comes with specific stipulations, including the amount of money you can withdraw. Always consult IRS resources to determine exception eligibility and rules.

How do I avoid penalties and taxes when accessing funds from my IRA?

The easiest way to avoid penalties when accessing IRA funds is to understand the most recent IRS guidance regarding qualified withdrawals. In general, you can avoid penalties if:

  • You are 59 ½ or older.
  • Have a Roth IRA that is at least 5 years old and your withdrawal is less than or equal to your total contributions.
  • You meet the eligibility requirements for an early withdrawal exception.
  • Use a 60-day rollover if you need a short-term loan and are confident you can redeposit the funds within the given time frame.

If you have a Traditional IRA, withdrawals will always be taxed based on your current income bracket. Roth IRAs, which are funded with after-tax dollars, allow for tax-free distributions.

Can I borrow from an IRA to pay for educational expenses?

Yes, you can use your IRA to pay for qualified higher educational expenses for you, your spouse, your child, or your grandchild.

Qualified educational expenses include the cost of tuition and fees as well as books, equipment, and supplies necessary as part of enrollment in an academic program. Qualified educational expenses may also include the cost of required special needs services and, if enrolled as at least a half-time student, the cost of room and board.