An Individual Retirement Account (IRA) is a specialized account designed to aid individuals in saving for retirement. Money saved in an IRA grows tax-deferred, but you agree to certain limitations on this privilege. One of these limitations is that before reaching the age of 59.5, you cannot withdraw funds from an IRA without incurring a penalty.
Another popular retirement account is the 401(k), from which account holders can borrow against their balance. You might ask yourself, “Can I borrow from my IRA?” However, you cannot take out a loan from your IRA or use it as collateral for a loan, even if you have sufficient funds in your account.
Can I Borrow from My IRA Without Penalty?
You cannot directly borrow from your IRA. The only way you can do something similar to borrowing from your IRA is by rolling it over into another IRA.
You can obtain a check for the account balance, and you have sixty days to deposit it into the new account.
If you fail to do so, you will not be able to replace that money, and you will be required to pay income tax on the withdrawn amount and incur a 10% penalty on the balance. It’s not advisable to do this even if you need the money because even being a day late on repayment incurs significant penalties.
If you do find yourself in a financial bind and need cash, you should consider using the 60-day grace period of an IRA as a short-term loan alternative to playing with fire.
Here are some alternative options to consider instead of borrowing from your IRA.
Avoid Borrowing from Your IRA – Try These Loan Alternatives Personal Loans
For those in financial need, one option is to apply for a personal loan. Personal loans don’t require any collateral, just proof that you have the ability to make monthly payments. Lack of collateral typically means you’ll pay a higher interest rate, but it’s usually better than attempting to borrow from retirement savings.
Online personal loan providers like Lending Club can offer quick loan decisions and loans of up to $50,000. If a personal loan seems like it could help in your situation, check out our comparison page for personal loans.
Home Equity Loan or HELOC
If you own a home or have a significant amount of home equity, you might consider applying for a home equity loan or home equity line of credit (HELOC).
Both are secured by your home, allowing you to obtain much lower interest rates than a personal loan.
A home equity loan is best for one-time large financial needs. You’ll receive a lump sum of cash deposited into your account and receive monthly bills until the loan is paid off.
If you have regularly unpredictable expenses or cash flow needs, a HELOC is the better option. You can withdraw cash from your line of credit as needed. Fees are assessed as you make withdrawals, and you have the option to pay the minimum balance, pay the full balance, or make payments in between. Like with credit cards, if you don’t pay the full balance, you’ll incur interest and receive another bill the following month. Once you’ve paid off the line of credit, we won’t charge you fees until you withdraw money again.
Debt Refinancing
If your need for cash arises from bills you can’t afford, consider finding a way to refinance your existing debt. Refinancing consolidates your multiple payments into one. You might lower your minimum payment by extending the loan term or by obtaining a lower interest rate through refinancing.
You can refinance by using a personal loan or taking advantage of zero-interest balance transfer offers on credit cards. Many credit cards attract customers by offering a period of time (typically twelve to eighteen months) with no interest, as long as you meet the minimum payment each month.
For high-interest loans, half or more of each payment might go towards paying interest. Taking advantage of one of these offers can help you pay down the principal debt more quickly.
In almost all cases, attempting to borrow from an IRA is a bad idea. Consider other possibilities before taking such a drastic step.
