How to Borrow from Your IRA. Should You?

If you are thinking about borrowing money, should you borrow money from IRA? If so, how do you? I’ll answer both questions. Here’s an e-mail I received recently from “R”:

I am age 79. I have an IRA currently valued in excess of 300K. We plan to buy another home before we sell the one we have. We need about $50K for the 20% down payment. I would like to borrow this from my IRA and pay it back later. Can I do this? We have this in bank savings, but we prefer not to use it for this purpose. Thanks!

R, thanks for writing. There is so much going on in your “question”…forgive me if I provide a mini IRA FAQ.

First, you can’t borrow from your IRA, but you can use some of the money for 60 days. Basically, if you take a distribution and then replace the money (even in a different IRA) within that 60 day period, you’re fine. If you don’t replace the money it will be a taxable distribution.

Unless you have a killer real estate deal that you have to buy now and also have a windfall coming in within that 60-day period, just use the money outside your IRA. You have the money in the bank so use it instead.

Now, let’s talk about some of the issues that are actually much more important.

R, in this day and age, why would you ever buy a home before selling your current residence? Can you afford those double payments? For how long? This is not a good idea at all. In fact, the idea of it gives me a migraine and hurts my stomach. Please forget it. If for no other reason, think of my health.

I understand that you might want to see your house and buy another, but is it worth the risk?

It also bothers me that you’re making these big changes at age 79. At this stage, you have to play defense. The last thing you need is to take on more financial responsibilities at this time. Of course there might be more to the story, but on the face of it, I don’t like what I see. It reminds me of a similar story:

I’ll never forget the case of Andy. This gentleman had the life of Riley – until he reached age 76. He had a good business that he “gave” to his son. He owned his home free and clear. His days consisted of playing golf and watching the Military Channel on cable. Does it get better than that?

Then, he got a brainstorm. Why not sell his home for $400,000 and buy a $2 million dollar home? Sounded good to him. And while he was at it, he gave away his three-year old Camry and bought a Jag. Genius! His wife kept telling him he was crazy and so did I, but he didn’t listen.

Can you guess what happened? Within two years he exhausted all his resources and had to go back to work (age 78 by then) for his son. Maybe I’m overreacting here, but it scares me when retirees make huge changes to their financial situation and take on more financial risk. A better way to go is to make smart investments for retirement income. Buying another house isn’t one of them for most people.

What would you tell R? Should he live it up and go for it? Should he keep his powder dry?

photo credit; Flikr, Epidemics