How to Borrow From an IRA

Employer plans, like 401(k)s and 403(b)s, often allow you to borrow some of your retirement nest egg, which can help you when money is short and you might not be able to get financing elsewhere. However, you're technically not allowed to borrow from any type of individual retirement accounts, including Roth IRAs, traditional IRAs, SEP IRAs and SIMPLE IRAs. IRS Publication 590-A specifically says borrowing from your IRA is a prohibited transaction. But, if you only need the money for a month or two, and are certain you can repay it, you might be able to access the funds in your IRA without tax consequences.

IRA Rollovers

One way to move money from one IRA to another is a rollover, where you take a distribution from one account and then, within 60 days, redeposit the money in another IRA. However, the rollover rules don't restrict what you can do with the money while it's between accounts. For example, if you need to close on a home next week, but your big annual bonus won't hit your bank account for 45 days, you can take the money out of your IRA today, make the down payment, and then use your bonus to complete the rollover.

Failure to Complete Rollover

If more than 60 days pass before you redeposit the money, you're out of time. Instead of being able to put the money back, it's treated as being permanently distributed from your IRA. That means you might owe income taxes and, if you're under 59 1/2 years old, a 10 percent early withdrawal penalty. For example, say you have a traditional IRA and you're under 59 1/2. If you take out $20,000, intending to roll it over but miss the deadline, you owe income taxes at your marginal tax rate and a $2,000 early withdrawal penalty.