Borrow From An IRA

Can you borrow from an IRA?  Most financial advisors will tell you it isn’t possible.  When Congress made the laws about individual retirement accounts, they specifically didn’t want people to be able to pull the money out or borrow it like you can with a 401k and some other retirement accounts.  So from a legal stand point, you can’t borrow from an IRA.

However, like many things there are some ways around the law.  In the case of borrowing from an IRA, the trick is to use something you can do in order to get a loan from the retirement account. In this case, the trick is to use the roll-over rules in order to get a short term loan.  You can legally move money from one individual retirement account to another.  When you do this, there is a period of time where you have the cash in hand and can use it for whatever you want.

The caveat is that you must have it back in an IRA before the rollover period expires.  If you don’t you’ll have to pay taxes on the money you took out as if it was earned in the current year.  Worse you’ll have to pay a 10% early withdrawal penalty on the funds.

The cost of not getting the money put back in is very high.  For that reason, it usually isn’t a good idea to try to borrow money like this.  However, it is an option and there may be certain situations where borrowing money from your IRA in this way may make sense.  It should be your last resort though and you need to really understand what you are doing to pull something like this off.

Make sure you understand the time period you can keep the money.  Also be sure you know how long it will take to open a new account.  In most cases you’ll want to have the account already created before you put the money in it.  You don’t want to forget about a holiday or have a brokers sick day mess up your plans and make you subject to the fees and penalties.

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