It’s not possible to take a loan from an IRA or Roth IRA. Making an early withdrawal from an IRA is an option, but that comes with taxes and penalties. You can borrow money from a 401(k) plan, however, without any penalties.
Read on to learn the impact of an early withdrawal from an IRA and some other ways to find the cash for unexpected expenses.
Can You Borrow from Your IRA?
An individual retirement account (IRA) is a savings account with tax advantages that is designed as a long-term investment vehicle for your retirement. The money that people invest in IRAs goes to a wide range of financial products, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Banks and investment companies rely on holding the funds for a long time, so lawmakers created strict rules around withdrawing money from traditional and Roth IRAs. There is usually a 10% penalty and an income tax bill.
IRA loans and Roth IRA loans are not allowed. You cannot borrow money from these accounts, but you can withdraw cash from your IRA if you have to, at a cost.
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What Is Possible: Early IRA Withdrawals
Here’s what you can and can’t do regarding withdrawing cash from traditional and Roth IRAs.
Traditional IRAs
If you are 59 ½ or older, you can take money out of your traditional IRA with no penalty, but you’ll owe income taxes on the money you pull out.
Account holders of any age can withdraw funds from an IRA and roll them over into another IRA or redeposit them into the same IRA within 60 days. This amounts to a 60-day loan, and you can do this once every 12 months. If you don’t roll over the funds within 60 days, the action will be considered a withdrawal or lump-sum cash distribution. That means paying federal and state taxes plus an additional 10% federal tax fee.
There are some exceptions that will allow you to avoid the additional 10% federal tax:
• First-time homebuyers can withdraw $10,000 for a downpayment.
• The funds are used for higher education expenses.
• The funds are used for the birth or adoption of a child.
• You have become permanently disabled.
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Roth IRAs
If you’re at least 59 ½ and you’ve owned your Roth IRA for five years or more, you can take tax- and penalty-free Roth withdrawals of contributions. However, if you withdraw earnings, such as dividends or interest, you might have to pay the 10% penalty and income and state tax on that portion of the withdrawal.
Drawbacks of Early IRA Withdrawals
Disadvantages of early IRA withdrawals are penalties and missed earnings on the money taken out.
Penalties
Before age 59 ½, you are subject to a 10% penalty on any amount withdrawn. The same penalty holds if you fail to redeposit a rollover within 60 days.
Taxes
Before age 59 ½, you are subject to federal and state taxes on early withdrawals.
Lack of Growth Potential
If you take funds out of your IRA, you will lose the earnings from that money that would otherwise go toward your retirement. In that sense, a $10,000 withdrawal could cost you much more than $10K in the long run.
Early IRA Withdrawal Alternatives
There are alternatives to withdrawing funds from an IRA. The best option for you depends on how much cash you need, the taxes and penalties you might pay, and the interest and fees you might pay on the alternative. Here’s a look at some of them.
401(k) Loan
Borrowing from your 401(k) is allowed. If your plan is amenable, you can take out as much as 50% of your savings, up to a maximum of $50,000, within 12 months. You will have to pay back the money, plus interest, within five years. However, the interest is paid back into your own account.
The advantage of a 401(k) loan is that there are no taxes or penalties. The disadvantage is that if you leave your current job, you may have to repay your loan in full. If you cannot, you’ll owe both taxes and a 10% penalty if you’re under 59 ½.
Family Loan
A family loan could be the best option if you can negotiate favorable terms. This route is also the most flexible but can affect family relationships if not handled well. Be sure to set expectations and draw up a contract to protect both parties.
Credit Card Cash Advance
A credit card cash advance is a quick way to get funds. No hard credit inquiry is needed, so there is no effect on your credit score. You can pay small fixed monthly payments, but there will be interest that accrues daily as well as fees.
The interest charges and fees will need to be weighed against the cost of an early withdrawal from an IRA. There may be a charge of up to 5% for a cash withdrawal. There may also be a flat charge for a withdrawal in addition to the percentage charge.
Depending on your credit line, the amount you can withdraw may be less than your credit limit.
Personal Loan
Most of the time, if you are looking for a specific sum of money that you would like to repay over time, a personal loan is a good choice. Current personal loan interest rates are generally much lower than for a cash advance.
Early IRA Withdrawal vs Personal Loan
Your decision may come down to an early IRA withdrawal versus a personal loan. Let’s look at the pros and cons of each.
Pros of Early IRA Withdrawal
• If you have a Roth IRA, you can withdraw contributions (but not earnings) free of tax and penalties.
• Early withdrawals provide emergency funds without interest and fees.
Cons of Early IRA Withdrawal
• You cannot repay the money you withdraw, so you will have less of a nest egg for retirement.
• If you withdraw gains from a Roth IRA, you may have to pay taxes and fees.
• You miss out on earnings from the amount that you withdraw.
Pros of a Personal Loan
• There are no withdrawal penalties with a personal loan.
• Your retirement savings stay intact, and you will continue to earn money on the funds.
• A personal loan can put cash into your bank account within one to two business days.
Cons of a Personal Loan
• Some shopping around is required, and there is an application process.
• A minimum credit score might be required.
• Average interest rates and fees could be high depending on your credit score.
The Takeaway
Account holders may not take out loans from an IRA or Roth IRA. Making an early withdrawal from an IRA is an option, but that comes with taxes and a 10% penalty. Because you cannot pay the funds back, a withdrawal loses out on the investment gains those funds would have earned. However, you can withdraw money from your IRA as long as you redeposit it or roll it over into a new account within 60 days. And you can borrow money from a 401(k) plan without any penalties.
Before you consider withdrawing from your IRA, consider a personal loan. SoFi offers competitive personal loans with no origination, prepayment, or late fees. Getting a personal loan is usually straightforward, and funds can be deposited as soon as the same day.
FAQ
Can I take a loan from my IRA?
There is no such thing as an IRA loan because you cannot pay the money back. You can withdraw funds from an IRA and roll them over into the same or another IRA within 60 days, and you can do this once every 12 months. If you don’t roll over the funds within 60 days, the action will be considered a withdrawal or lump-sum cash distribution. That means you will have to pay federal and state taxes plus an additional 10% penalty.
How do I get an IRA loan?
You can’t borrow from your IRA. However, if you’re 59 ½ or older, you can request a distribution from your traditional IRA without any penalty. Since your original contributions were tax-deductible, you’ll need to pay income tax on the funds you withdraw.
If you have a Roth IRA, you can withdraw both contributions and earnings tax-free and penalty-free, but only if you are 59 ½ or older and have owned your Roth IRA for five years or more. If you withdraw earnings early, you’ll have to pay a 10% penalty and income tax on the amount you withdraw.
Lastly, you can use the 60-day rollover rule to your advantage if you can repay the borrowed money in 60 days or less and avoid paying taxes and penalties.
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SoFi Loan Products
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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