Can You Borrow From an IRA Loan?

Whether you want to remodel your home, buy a car, or cover any other big expense, you’re likely looking at all your options for financing.

Maybe you have an Individual Retirement Account (IRA) and you’re wondering, “Can I take a loan from my IRA?”

While there’s no such thing as an IRA loan, there are ways to get the money you need. Here’s what you need to know, including the potential risks involved, plus other financing options you may want to consider instead.

What Is a Loan Against an IRA?

You may have heard that it’s possible to borrow against the money in your Individual Retirement Account, but in fact, IRA loans don’t exist. However, there are situations where you may be permitted to withdraw funds from an IRA without having to pay a penalty.

As a refresher, an IRA is a tax-advantaged retirement account that allows you to set aside money for the future. There are three types of IRAs:

• Traditional IRA: Your contributions may be tax-deductible, and earnings are generally not taxed until you take them out in retirement.

• Roth IRA: Your contributions are made after you pay taxes, and earnings may grow without additional taxes until you take them out in retirement.

• Rollover IRA: You move funds from a qualified employer-sponsored retirement plan, such as 401(k) or 403(b), into a new IRA account.

Options for Accessing Traditional IRA Funds

While there’s no IRA loan, there are a few methods for accessing the money you’ve set aside for retirement in your IRA. They include:

Penalty-Free Withdrawals

If you have a traditional IRA and are 59 ½ or older, you may withdraw funds from your IRA with no penalty. 

Before age 59 ½, you are typically subject to a 10% penalty for taking funds out of your IRA. However, there are a few exceptions to this rule that generally allow you to withdraw funds without penalties, including these:

• First-time home purchase

• Educational expenses

• Disability 

• Medical expenses

• Birth or adoption expenses

• Health insurance premiums after job loss

Penalized Withdrawals

If you aren’t 59 ½ or older, or you don’t qualify for one of the exceptions, taking funds from a traditional IRA may result in taxes and penalties. Generally, this early withdrawal is included as part of your taxable income on your taxes, with an additional 10% tax penalty.

Recommended: Is Using an IRA to Pay Student Loans a Good Idea?

Short-Term Rollovers 

While it’s not exactly an IRA loan, there’s a potential way to get cash for the short term, as long as you’re able to pay it all back very quickly. It’s called a short-term IRA rollover. But as a way to borrow money, it’s risky and may be complicated to do. 

With a rollover, you take the money out of your IRA and roll it over to another retirement account. You need to complete the rollover within 60 days to avoid an early withdrawal penalty and taxes. During that time, you may do what you like with the money.

But, if you don’t pay the money back within 60 days, you may be hit with the early withdrawal penalty of 10%, plus the money may be taxed as income. It’s important to fully understand and carefully weigh the risks of this method since it could put your retirement funds in jeopardy.

Options for Accessing Roth IRA Funds

If you’re 59 ½ or older and have owned your Roth IRA account for five or more years, you may withdraw funds from it without owing taxes or penalties. This isn’t a Roth IRA loan, but it’s a possible way to access your money.

If you’re younger than 59 ½, you may also be able to withdraw the amount you put into the Roth IRA without taxes or penalties. However, you generally are not able to withdraw earnings from the account. If you do, you may be subject to the 10% penalty — unless you’re withdrawing money for one of the exceptions mentioned above, such as buying your first house or using the money to pay for health insurance after losing your job.

Penalized Withdrawals

The same penalty applies to early withdrawals from Roth IRAs as it does to withdrawals from traditional IRAs: An early withdrawal of the investment earnings before age 59 ½ is generally considered part of your taxable income, and you could pay an additional 10% fee. That is, unless you are using the money for one of the exceptions, as noted.

Drawbacks of IRA Withdrawals

If you’re considering withdrawing money from your IRA, be aware that there are consequences that might cost you.

Penalties 

You pay a 10% penalty on the amount you withdraw unless you meet certain qualifications as covered above. This cost may be more than what you’d pay in interest with another lending product, such as a personal loan.

Potential Growth 

Another major drawback is that you won’t continue to earn returns to help fund your retirement if you take money out of your IRA. That loss of potential growth could leave you with a shortfall or push back your retirement.

Tax Hit

The money you withdraw from your IRA may be taxed as gross income. 

Personal Loan vs IRA Withdrawal

With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. There are no penalties for borrowing money unless you fail to pay it back or you miss payments. With a personal loan, the higher your credit score, the lower the interest rate you may get.

A personal loan may be used for virtually any purpose, from remodeling your home to going on vacation. There are many different personal loan types you may want to look into.

Also, when you make your monthly personal loan payments on time, you might be able to strengthen your credit. With an IRA withdrawal, your credit is generally not affected.

IRA Loan Alternatives

Here are some other financing options that may be a better fit for your borrowing needs than an IRA withdrawal: 

Passbook Loan 

Passbook loans are loans secured by money in your savings account. You borrow money without draining your entire savings account, and the interest rate may be lower than with some other loan products. However, should you not be able to repay the loan, the money would be taken from your savings to cover it.

Credit Card 

Another option is to use a credit card to pay for your expenses. You may be able to get a rewards credit card so that you earn perks when you spend. But keep in mind that credit cards often come with high interest rates if not paid in full every month.

Cash 

With cash, you won’t pay interest or fees, but it may take a while to save up enough to cover your expenses.

Personal Loan

As mentioned, personal loans are a lump sum of money that you borrow from a bank, credit union, or online lender and repay monthly over time. Each lender has different criteria for qualifying for a loan, and factors such as your credit score, income, and existing debt may determine the rate and terms you get. 

A personal loan might be a good option for covering your expenses, but before applying, carefully consider the pros and cons of personal loans.

The Takeaway 

While there’s no such thing as an IRA loan, there may be ways to withdraw money from your IRA account if you’re of eligible age or have a qualifying event. However, an IRA withdrawal might be risky and may come with taxes and penalties. Plus, you could be jeopardizing your retirement funds. Weigh all your options carefully before proceeding.

A personal loan could be a way to get the funds you need without potentially risking your retirement funds. If you’re considering a personal loan, Lantern by SoFi can help you explore your options. In our online marketplace, you can quickly and conveniently get options from multiple lenders to find the best one for you.

Compare personal loans all in one place with Lantern.