Can You Borrow From an IRA Loan?

Susan GuilloryUpdated December 30, 2022

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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 IRA and you’re wondering, can I take a loan from my IRA?While there is 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 you can 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 retirement account that allows you to set aside money tax-free. There are three types of IRAs:

Traditional IRA: Your contributions may be tax deductible, and earnings may be tax deferred until you take them out in retirement.
Roth IRA: Your contributions are made after you pay taxes, and earnings may be tax-free until you take them out in retirement.
Rollover IRA: You move funds from a qualified employer-sponsored retirement plan like a 401(k) or 403(b) into a new account.

Options for Accessing Traditional IRA Funds

While there is 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 59½ or older, you can withdraw funds from your IRA with no penalty. Before age 59½, you will typically be charged 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 59½ or older, or you don’t qualify for one of the exceptions, taking funds from a traditional IRA will result in penalties. Generally, this early withdrawal will be included as part of your gross income on your taxes, with an additional 10% tax penalty.

Short-Term Rollovers

While it’s not exactly an IRA loan, there is a potential way to get cash for the short term, as long as you can 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 can 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. During that time, you can do what you like with the money.But if you don’t pay the money back within 60 days, you will be hit with the early withdrawal penalty of 10%, plus the money will 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 59½ or older and have owned your Roth IRA account for five or more years, you can withdraw funds from it tax- and penalty-free. This is not a Roth IRA loan, but it is a possible way to access your money.If you’re younger than 59½, you may also be able to withdraw the amount you put into the Roth IRA without taxes or penalties. However, you can’t withdraw any earnings the account made. If you do, you’ll 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 on Roth IRAs as it does with traditional IRAs: An early withdrawal before age 59½ will be considered part of your gross income, and you’ll 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’ll pay a 10% penalty on the amount you withdraw, unless you meet certain qualifications as we covered above. This cost may be more than what you’d pay in interest with another lending product, such as a personal loan, for instance.

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 will be taxed as gross income.

Personal Loan vs IRA Withdrawal

Now that you know there is no such thing as a loan against an IRA, you might want to consider the benefit of a personal loan. 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 can be used for virtually any purpose, from remodeling your home to going on vacation. There are even different personal loan types you may want to look into. Explore your options by comparing these loans to one another.When you make your monthly personal loan payment on time, you might be able to strengthen your credit. You can’t do that by taking an IRA withdrawal.

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 can earn perks when you spend. But keep in mind that credit cards often come with high interest rates. This credit card comparison can help you look at different rates and terms.

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 defined 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 like 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 is no such thing as an IRA loan, there may be ways you can withdraw money from your IRA account if you are of eligible age or have a qualifying event. However, an IRA withdrawal can 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 offers from multiple lenders to find one that works best for you.Compare personal loans all in one place with Lantern.

Frequently Asked Questions

Can you take a loan out against your IRA?

How can I borrow from my IRA without penalty?

What are the risks of getting an IRA loan?

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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