An Individual Retirement Account (IRA) is a special type of account designed to help people save for retirement. Money placed in an IRA enjoys tax advantages, but with some restrictions in exchange for these benefits. One such restriction is that funds cannot be withdrawn from an IRA before the age of 59 and a half without incurring a penalty.
Another popular retirement account, the 401(k), offers account holders the ability to borrow from their 401(k) balance. This might lead you to wonder, “Can I borrow from my IRA?” Unfortunately, you cannot borrow from an IRA or use an IRA as collateral for a loan, even if you have sufficient funds in the account.
Can I Borrow from My IRA Without Penalty?
Direct borrowing from an IRA is not possible. The closest thing to borrowing from an IRA involves making a rollover to another IRA.
You can receive a check for your account balance, and you have sixty days to deposit it into a new account.
Failing to do so means you won’t be able to replenish the money, and you must immediately pay income tax and a 10% penalty on the withdrawal balance. This is not advisable even if you need the money, as failing to return the money on time subjects you to hefty penalties.
If you find yourself in financial trouble and in need of cash, consider alternative solutions instead of risking using the IRA’s 60-day rollover as a short-term loan.
Here are some alternatives to borrowing from an IRA you should consider.
Alternatives to Borrowing from an IRA
Personal Loan
For those in financial difficulty, one option is to apply for a personal loan. Personal loans do not require any collateral but do require proof of your ability to make monthly repayments. The lack of collateral usually means you’ll pay a higher amount of interest, but it’s typically preferable to borrowing from your retirement savings.
Online personal loan providers like Lending Club can provide you with a loan decision quickly and offer loans up to $50,000. If you think a personal loan could help you out of your situation, check out our personal loan comparison page.
Home Equity Loan or HELOC
If you own your home or have a substantial amount of home equity, you might consider applying for a home equity loan or a Home Equity Line of Credit (HELOC).
Both loans are secured by your home, so you can get much lower interest rates than with a personal loan.
A home equity loan is best suited for one-time financial needs. You’ll receive a lump sum in your account and receive a bill each month until the loan is repaid.
If you have unpredictable periodic expenses or cash flow needs, a HELOC is the best choice. You can withdraw cash from the credit line as needed. When you make withdrawals, you’ll receive a bill, and you can choose to pay the minimum balance, pay off the balance in full, or something in between. Like a credit card, if you don’t pay off the bill balance in full, you’ll incur interest charges and receive another bill the next month. Once you pay off the credit line, you won’t receive any more bills until you make another withdrawal.
Debt Refinancing
If you need cash because you’re unable to pay bills, consider looking for a way to refinance your existing debt. Refinancing can consolidate your payments into one. It can also lower your minimum payments if you extend the term of the loan or secure a lower interest rate through refinancing.
You can use a personal loan or take advantage of zero-interest sign-up offers with credit cards for refinancing. Many credit cards offer a period (usually twelve to eighteen months) after opening an account to attract customers, where you won’t be charged interest as long as you make the minimum monthly repayments.
With high-interest loans, half or more of each repayment might go toward paying interest. Leveraging these deals can help you pay off the principal of your debt faster.
In almost all cases, attempting to borrow money from an IRA is a bad idea. Consider other possibilities before taking such a drastic measure.