Your individual retirement account is a tax-advantaged way for you to set aside money for retirement. To help prevent you from raiding your savings for a short-term need, the Internal Revenue Service makes it difficult to take money out of an IRA without paying a penalty. Strictly speaking, you can't borrow from your IRA. However, there is a provision that allows you to take a short-term, penalty-free withdrawal on a limited basis.
Taking any type of loan against your IRA is prohibited, even for just one month. The IRS classifies both borrowing money from your IRA and using it as collateral for a loan as prohibited transactions. If you commit a prohibited transaction, the IRS considers your entire IRA to have been withdrawn as of the first day of that year. Because IRA distributions are taxable, your entire account value becomes immediately taxable. And if you're younger than 59 1/2, you'll owe a 10 percent early-distribution penalty.
The rollover provision available for IRAs is one way around the prohibition on loans. The IRS allows you to roll over money on a tax-free basis between retirement accounts, such as from one IRA to another. Because the rollover provision doesn't specify that you must move money between different accounts, you can take money out of your IRA and return it to the same IRA.
If you use this short-term "borrowing" strategy to take money out of your IRA, you have to wait 12 months before you can do it again. To prevent an endless succession of short-term withdrawals, the IRS lets you roll over money only once per year from each individual account. Additionally, if you don't redeposit the money into any kind of retirement account within 60 days, the IRS will consider your rollover to be a distribution, subject to income tax and early-distribution penalties.
Many other types of retirement accounts, including 401(k) plans, don't have the same restrictions against loans that IRAs do. Although the IRS doesn't mandate that a 401(k) offer loans, most employers make such loans available for employees. If you want to take a true loan against your retirement money, you might be able to transfer your IRA into your employer's 401(k) plan.
- IRS: Publication 590 -- Prohibited Transactions
- IRS: Publication 590 -- Rollovers
- IRS: Publication 590 -- Are Distributions Taxable?
- IRS: Publication 590 -- Early Distributions
- SmartMoney: Borrowing From Your IRA
- IRS: Rollover Chart
- IRS: 401(k) Resource Guide -- Plan Participants -- General Distribution Rules
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