Self-Directed IRA Expert: Horizon Trust BlogDecember 1, 2022by horizontrustCan I Borrow Against My IRA: Rules and Penalties

If you opened an IRA, your goal is likely to make sure you have a financial nest egg you can tap into once you leave the workforce. 

Most retirement plans, including a self-directed IRA and Roth IRA, allow you to withdraw your funds tax-free at the age of 59 ½. 

But what if you need to access your funds sooner? Unfortunately, making early withdrawals may lead to unwanted penalties and fees. But that also leads to another important question: can I borrow against my IRA?

If you’re considering tapping into your retirement funds early and borrowing against your IRA, here’s what you need to know. 

 

Can I borrow against my IRA without penalty?

 

Unlike a 401k, you can’t technically borrow against your IRA, traditional, Roth, or otherwise, without avoiding an early withdrawal tax. However, there are still ways you can access your funds if need be. 

While most accounts restrict early withdrawals, you can make penalty-free withdrawals on contributions if you have a Roth IRA. However, if you withdraw the interest earned, you’ll have to pay a penalty. 

So if your financial needs match your current contribution amount, you can “borrow” against your account. But you’ll be on the hook for reinvesting your funds later, as there won’t be an official repayment plan like there would be with a 401(k) loan.  

On the other hand, if you do intend to pay yourself back and redeposit funds, take note of contribution limits. Currently, the IRS limits IRA contributions to $6,000 a year, or $7,000 if you are 50 or older. So if you’re already maxing out your contribution limits or are close, it may be difficult to “repay” what you took out.

But what if you have a traditional IRA or didn’t contribute enough to your Roth IRA? Under the following circumstances, you can typically withdraw money without penalty if you are using funds to:

  • Purchase your first home
  • Cover qualified educational expenses
  • Cover unreimbursed medical expenses
  • Pay for certain birth or adoption expenses

However, if you want to borrow funds, but the reason doesn’t fit into one of the categories above, you may have one last option: taking out and repaying funds within 60 days of the withdrawal. 

 


 

Consult with Horizon Trust


What is the 60 Day rule?

 

As the name suggests, the 60-day rule is an IRS rule that lets investors move their money out of and back to an IRA account within 60 days. The 60-day rule commonly comes into play when an investor is moving funds from one retirement account to another, as may be the case if you have a change of employment and need to move funds from a 401(k) account.  

Under this rule, you can withdraw funds once every 12-month period and maintain possession of those funds for 60 days (from the withdrawal date) without worrying about taxes or penalties. 

Also known as an indirect rollover, this same practice can be used to meet potential borrowing needs. You’d simply withdraw the funds at your discretion and then deposit the same amount within 60 days. 

It’s important to note that when you execute a 60-day rollover, your custodian will keep a mandatory 20% of the requested amount and give it to the IRS to hold. For instance, if you withdraw $10,000, your custodian will withhold $2,000, and you’ll receive $8.00.  

When you complete the rollover in the designated 60 days, you’ll need to deposit the entire amount back int your account ($10,000 in the example above). That means you’ll be on the hook for coming up with the additional 20% ($2,000 in the example above). Once you deposit the original withdrawal amount, you’ll receive the funds that were held. If you don’t deposit the full amount, you’ll likely face taxes and penalties. 

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Can a self-directed ira take out a mortgage?

 

You can use your self-directed IRA to buy a house, but that doesn’t mean you can live in the house. You can only use a self-directed IRA to purchase an investment property. 

According to IRS rules, you cannot live in, work on, or use the property for self-dealing. The same is true for other “disqualified people,” which include your spouse, ancestors, or descendants. 

If you purchase an investment property with your SDIRA, all proceeds must go directly back into the IRA account. 

 

Should you roll over funds instead?

 

You cannot borrow from your IRA, but if you want access to your funds for a brief window of time, an indirect rollover may be an option. 

According to the 60-day rule, which applies to all indirect IRA rollovers, you can withdraw funds for a period of 60-days. When you withdraw the funds, your custodian will withhold 20% to be sent to the IRS.  

If you need the funds and are confident that you can return them in the full amount (including the 20% held as a safeguard), then a rollover may fit your needs. However, if you can’t repay them in the required period, a rollover is not your best option to access IRA funds. 

 

What is a 401(k) loan, and is it a better option?

 

Unlike an IRA, some 401(k) accounts offer a loan benefit. With a 401(k) loan, you borrow from your employer-sponsored retirement account. 

Much like a traditional loan, you must apply for the loan and make regular payments for a specified period. You’ll also need to pay interest on the loan, though that interest goes back into your 401(k) and not to a lender

You can borrow up to 50% of your vested account balance or $50,000, whichever is lesser. In some cases, if you don’t have at least $10,000 invested funds, you can still borrow $10,000, though plans vary. The repayment period is typically 5 years. 

Employers aren’t required to offer a 401(k) loan option, so if you’re considering this type of financing, it’s important to speak to your plan administrator. They can also provide information on how much you can borrow, how many loans you can take out, and any other plan rules or requirements.

Because a 401(k) loan is a true borrowing option, it may be a better option than withdrawing funds from your IRA. And, since you are required to repay the loan, there are no taxes or penalties for temporarily accessing your funds. 

Borrowing from your 401(k) isn’t without drawbacks, however. If you can’t meet the repayment requirements and you’re under the age of 59 ½, you may be subject to a 10% penalty. In addition, if you change jobs while you have an outstanding loan, you may be required to repay it in less than the typical 5-year repayment period. 

Finally, as is true, any time you withdraw funds from a retirement account, taking out a large chunk of money may mean you lose out on growth opportunities, such as compound interest, or risk not being able to replace the funds. Always proceed with caution.

 

When can you withdraw funds without penalty?

 

Once you reach the age of 59 ½, you can withdraw from your IRA without penalty. You may also be able to withdraw funds without penalty if you’re using them to purchase your first home, cover a medical debt, pay for birth or adoption costs, are disabled, or need to cover unreimbursed medical expenses. 

If you have a Roth IRA, and it’s been open for at least five years, you can withdraw from contributions without paying penalties. Withdrawing interest earned will result in a penalty. 

IRAs are designed to help you save for the future, and many rules regarding withdrawals are designed to make that happen. Under certain circumstances, like purchasing a home or having a baby, you may be able to tap into your IRA funds, but unlike a 401(k), there is no direct option to borrow from your IRA.  

If you need temporary access to funds, you may be able to do so through a 60-day rollover, though you’ll need to pay them back in full within the specified period to avoid penalties. If you’re considering using your IRA to fund a project or expense, talk to a financial advisor about your options or contact Horizon Trust to learn more about how to make your retirement funds work for you. 

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