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With rising prices and surging inflation, you might be considering borrowing from your individual retirement account, or IRA. But you can’t take a loan against your IRA.
If you need cash, you may be able to make a withdrawal from an IRA under certain circumstances, but there can be severe tax consequences. A better bet might be an alternative source of funds, like a personal loan.
With Credible, you can easily compare personal loan rates from multiple lenders in just minutes.
The IRS doesn’t permit IRA loans. You also can’t borrow from other IRA-based plans like an SEP (Simplified Employee Pension plan). This is largely because an IRA is a tax-advantaged way to save for retirement and isn’t intended to be a source of income or fast cash before you reach retirement age.
If you decide to take a loan from an IRA, despite the rules, the IRS will no longer consider the account to be an IRA — and will require you to report the entire value of the account as income.
Even though you can’t take a loan from an IRA, you can withdraw money from the account whenever you want. But there are consequences if you take funds from an IRA before a certain age.
If you withdraw money from your IRA before you’re 59 ½, the amount you withdraw will be included in your gross income and subject to federal income tax. You may also pay a 10% penalty on top of the income tax, but there are exceptions. For example, you might not be penalized if you withdrew the money early to pay for medical insurance after you lost your job.
Normal IRA distributions
After you reach the age of 59 ½, you can take funds out of your IRA penalty-free. Traditional IRAs are tax-advantaged or tax-free savings, which means you don’t pay income tax on money you deposit into your IRA. But any withdrawals will be included in your taxable income in the year of the withdrawal.
Roth IRA withdrawals
You can take money out of your Roth IRA before you retire, at any time and any age, without paying penalties or taxes, but only in certain circumstances. These can include:
- You withdraw only the amount of your original Roth IRA contributions.
- You’ve had the Roth for five years or longer, and you’re older than 59 ½.
- You’re younger than 59 ½ and you’ve had your Roth for more than five years, but you’ve become disabled, a beneficiary is inheriting the Roth, or you’re using the distribution to buy or rebuild a first home.
Rather than risk taxes and a penalty for making an early withdrawal from an IRA, a personal loan can be a better alternative. You can easily and quickly compare personal loan rates when you use Credible.
You can withdraw money from your IRA at any time, and there’s no need to show hardship. But if you’re thinking about withdrawing IRA funds before the age of 59 ½, the IRS will consider it an early distribution.
As mentioned earlier, you’ll have to pay state and federal taxes, and possibly a penalty — unless you’re using the money for specific exceptions. These might include:
- Expenses related to having a child, either by birth or through adoption
- A first-time home purchase
- Death or disability of the account holder
- Paying for qualified education expenses
- Paying for health insurance if you’ve lost your job
- Certain medical expenses
You may pay a 25% early withdrawal penalty if you take a distribution within the first two years of opening a SIMPLE IRA.
Borrowing from your retirement plans is never the best idea when you need money. But there are alternatives to IRA withdrawals, so you have retirement savings and more control over your finances down the road:
- Personal loan — Personal loans generally aren’t secured. That means they aren’t tied to any collateral. As a result, there’s a higher risk to the lender for personal loans, which could translate to higher interest rates if you don’t have good credit. You can use a personal loan for almost anything, and their fixed rates make budgeting easier. But fees and penalties can add to the cost of the loan amount, and monthly payments can be higher than many credit cards — although you’ll generally pay less in interest for a personal loan.
- 401(k) loan — Like an IRA, a 401(k) is a retirement savings account. There’s no minimum credit score required for a 401(k) loan, and it won’t show up on your credit report. You won’t pay a penalty tax or income taxes on the amount you withdraw, and most often, you pay back your loan with automatic deductions from your paycheck. But there are limitations. You may lose gains from investments on the amount you withdraw, you can only withdraw $50,000 or 50% of your account balance, and if you don’t repay your loan on time, you may pay taxes and penalties.
- Home equity loan — Home equity loans use the equity you have in your home as collateral. For that reason, there’s always the risk of losing your home if you default on the mortgage loan for your primary residence. Loan interest may be tax-deductible depending on what you use the money for. Home equity loans also offer predictable payments and low interest rates, but they come with origination and application fees and often require a home appraisal.
- Borrow from family or friends — Although one of the most inexpensive ways to get the cash you need, borrowing from family and friends can sour a relationship if not repaid as promised. Your credit score doesn’t matter, and if you pay interest on the money, it’s usually much less than other funding options. But the IRS has established guidelines for lending to family members, including a fixed repayment schedule, signed written agreement, and a minimum interest rate. Plus, if you borrow more than $10,000, your family member will have to report it on their taxes.
If you’re ready to begin comparison shopping for a personal loan, you can easily compare rates from multiple lenders with Credible.