IRA Loan Strategy

Unlike a 401(k) the rules regarding individual retirement accounts or IRAs specifically forbid them from being used as collateral for a loan. Also unlike a 401(k) you cannot borrow money from your IRA. That’s just the way the tax laws are structured. It isn’t necessarily fair and gives an advantage to people who have company-sponsored retirement accounts, but that’s the way it is.

However there is a small loophole that will allow you to get a 60 day loan from your IRA by using the provisions that allow you to transfer money from one IRA to another. If you want to move your IRA to a different row grid’s the IRS gives you 60 days to complete the transaction. The clock starts ticking as soon as you take the money out of the original IRA.

What you do with the money during the 60 days is up to you. You can use it effectively as the 60 day loan. You just must be very careful to put it back into another IRA account before the 60 days expires. If you don’t you will have taxes due on the entire amount plus a 10% penalty. Depending on your tax bracket for the year this could wipe out upwards of 40% of the value of your IRA.

This type of financial maneuver is not highly recommended. They’re only a few circumstances where it would be worth taking money out to make a purchase like this. For example if you had the opportunity to buy some real estate where you need pay cash up front and were certain to be able to refinance within the 60 day period this type of loan from your IRA might make sense financially. However in almost every circumstance people looking at doing this can find a better option. The risk is simply too great of not being able to get the money move back in time to avoid the penalties and taxes.

So was not recommended it still is useful to understand your options. Knowing that there is indeed a way to get a short-term loan from an IRA may allow you to look at some potential deals that would be unavailable to you otherwise. It also may allow you to put more money in your IRA then you’d be comfortable doing without understanding this IRA loan. When you understand the IRA loan you know that there is a way to get money out and do something with it if it becomes absolutely necessary–it’s just for a very short period of time.

Once again this is not a recommended financial strategy. However it may give you some peace of mind in knowing that there is a way to get access to your money for sure. Time if you need it. For example, eat have assets that you can liquidate but require 30 to 45 day lead time, you may be very hesitant to keep a great deal of your money in an IRA because of the amount of time it would take you to liquidate your other assets. However this IRA loan strategy may make it more feasible to invest more heavily in an IRA because you know you can give yourself a short-term loan that will cover the amount of time it takes you to liquidate or other assets.

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