Is Your IRA A Source for Short Term Borrowing?

by Neal Frankle, CFP ®

If you need to do some short term borrowing, you might be tempted to tap your IRA for that cash. It’s there. It’s yours. Why not use it? As you’ll see below, there are plenty of reasons to think twice or three times before moving forward with this scheme.

How to Borrow From Your IRA

It’s actually very easy to get your paws on that lucre. All you have to do is contact your IRA custodian and complete an IRA distribution form. That’s it. Within 5 days (maximum) you should have the dough. This assumes that the investments you have within your IRA are liquid. If you used your IRA to buy real estate or annuities, you might have to wait much longer and/or pay hefty penalties to get at your money.

Will You Have To Pay Taxes On Your IRA Distribution?

If you return the money within 60 days you won’t have to pay a dime in tax.

But if you don’t repay your IRA within 60 days two things happen. First, it’s fully taxable which may mean you’ll also have to pay a 10% penalty too unless you are over 59 ½ or you qualify for a penalty free IRA withdrawal. Second, after 60 days expire you can’t put the money back and that means you lose the opportunity to grow your “gelt” tax deferred.

What’s Wrong With Borrowing From An IRA?

First, if you have no other alternative (and I really mean no other alternative) and you absolutely need the money, you may have no choice. If that’s the case, OK. But this should really be the source of last resort. Here’s why:

If you need to borrow money but have limited resources, consider using Lending Club. They are typically far cheaper than leaning on credit cards. And in most cases, it is a far better choice than using your IRA unless you are 100% certain that you can put the money back within the 60 day time period.

1. Taxes and Penalties

As I said before, if you don’t repay that money within 60 days you’re going to be in a world of pain. You will pay income tax on that distribution money plus you may incur penalties to boot. That’s no way to grow your net worth Pilgrim.

2. Addicting

You can see how easy it is to get at that loot. Once people start going to this well they often find it very difficult to stop coming back for more – until they drain the well dry.

3. You Won’t Repay It

In my experience very few people repay the money they withdraw from their IRA even though they start off with the intention of doing so. In your case I could be wrong. But I think it’s worthwhile to keep this in mind.

4. Lose Out On Tax Deferral

Tax deferral is pretty powerful and a great way to grow your assets. It’s the main reason why most people have the lion’s share of their liquid assets in retirement accounts. If you spend that money you lose out on the opportunity to multiply your assets using this tool.

5. Diminished Ability To Retireshort term borrowing

Your IRA money is meant to help create retirement income when the time comes. If you slash that account balance now, you’ll ultimately have far less income when you call it a day at work.

The last problem with borrowing from your IRA is that it may mask some deeper problem like overspending. You might tell yourself that you need this emergency money in order to take care of some unexpected financial crisis. This might be true. But my experience tells me that people often find themselves in this pickle because they don’t have enough emergency money set aside or because they don’t really know what it costs them to live, on average, each month. Other than medical emergencies and/or sudden and prolonged loss of a job, if you need to dip into your IRA to cover your living expenses, it’s time to make some big changes to your financial life.

Have you ever borrowed from your IRA? Did you repay the money?

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