Many people wonder if they can borrow money from a Roth IRA. The answer is you don’t have to. With a Roth IRA the principal amount can be withdrawn without any tax consequence because you’ve already paid taxes on it. This means you can borrow the principle from a Roth IRA. The increase is a different matter. The amount that your IRA has increased is not available for withdrawal without paying certain types of taxes and fees. However the ability to withdraw the principle from Roth IRA if you find yourself in financial hardship is a very great benefit.
There is one case where you can’t directly withdraw the original investment from a Roth IRA. If you rolled the funds over from a traditional IRA into a Roth IRA the amount rolled over or may not be available for penalty fee withdraw for five years. So if you have a traditional IRA with $10,000 in it and in 2010-year-old that over into a Roth IRA, you will not be overtake out the $10,000 until 2015. This means if you think you may need to access funds you have a traditional IRA you may want to do a rollover as soon as possible in order to put yourself in a good position to have cash available five years from now.
Of course don’t forget that when you pull money out of her traditional IRA and rolled over to a Roth IRA you will have to pay taxes on it. The taxes are at your marginal rate and if you are doing a qualified rollover to a Roth IRA you will not have to pay any additional fees or penalties. By carefully timing to roll over to take advantage of your current income levels you may be able to benefit from a year or you have lower-than-expected income or when you have other types of tax credits that can help offset the taxes you would need to pay on the rollover amount.
For example, if you have a year where you have lower than average income but you are in a position to benefit from some non-refundable tax credits, during a rollover in that year may allow you to benefit from a tax credits where you would not be able to otherwise due to your low income. If you were to wait and do a rollover in a year when you have plenty of income the rollover amount will be taxed at your marginal rate which means it will be taxed at the highest rate at which you pay income tax. So the first portion of your income is taxed at 10% and, the second portion is taxed at 15%, and the third portion is taxed at 30% a rollover in that year will be taxed at 30% whereas a rollover in a year where you are only in the first two tax brackets would only be taxed at 15%. (I’m just making up numbers for different tax brackets here so don’t rely on these for tax planning. If you need another tax brackets check out IRS website or one of the many other sites that will help you calculate your tax bracket based on your income.)
So back to the original question. Can you borrow money from your Roth IRA? Yes you can. You can borrow from a Roth IRA as long as you are borrowing more than your initial contribution. In reality you are borrowing money from your Roth IRA–you’re simply withdrawing your original contribution that you’ve already paid taxes on. So it’s not really borrowing any more than it is borrowing to take money out of your own checking account. However, if you plan to put the money back for continued tenure to grow then you are effectively making a loan to yourself from your rock Aire account.