How to borrow from your IRA
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If you talk to most financial planners and tax experts, they will tell you that you aren't allowed to borrow from an IRA. Technically they are correct. However, like most things the government sets up there are loopholes that you can take advantage of if you know how. When it comes to IRAs the loophole is the mechanism that allows you to transfer your IRA funds from one account to another. When you transfer funds, you have 60 days to complete the transaction. This 60 day window can effectively work as a 60 day loan.
However, you must understand the risks of such transaction. If you are unable to repay the loan within the 60 day window, you will have to pay taxes on the entire amount plus a 10% penalty. Depending on your tax rate, this can be a significant portion of the value of your IRA. Because the stakes are so high this type of transaction is usually not recommended. Most people should not borrow money from their IRA.
However, it is still worth understanding exactly what is possible so you know what all of your options are. Borrowing money from your IRA to help with the financial downturn is probably a very bad idea. Borrowing money from your IRA to take advantage of a once-in-a-lifetime opportunity where you can arrange financing within a 60 day period once the deal is closed, might be a reasonable use of this strategy.
Be aware that the IRS does not particularly like it when people do this. In some cases the IRS has been known to be lenient in applying the 60 day rule for people who were unable to complete the transfer due to sickness or other problems. However, the IRS offers no leniency when the purpose of the rollover was simply to get the 60 day loan. If you are obviously using the transfer loophole to borrow money from yourself, the IRS will demand the payments at the end of 61 days.
They're almost always better ways to borrow money then using this loophole with your IRA. Don't forget that many other types of retirement accounts do allow you to borrow from them. 401(k)s and 403(b)s both offer this type of arrangement. Usually you have to transfer your money out of stocks and mutual funds and into a cash only account before you can borrow the money. This means you will miss out if the market rises, but you're also protected if it falls.
While borrowing from an IRA is technically possible for 60 days, it is rarely a recommended strategy. Still, it is useful to know all your options.