How to Borrow from Your IRA. Should You?

Let me cut right to the chase; if you need money, the last place to go for it is your IRA. I’ll explain why that is in a minute.  At the same time, I understand that sometimes people just don’t have a choice.  If that describes you, I’ll also share a few ideas on how to access that retirement money while doing the least damage possible.

Are You Allowed To Borrow From Your IRA For Any Reason?

The government doesn’t care why you take money out of your IRA.  They’ll tax you on every dime you withdraw plus charge you penalties if you are under age 59 1/2 (unless you meet one of the tests for an exception).

You can borrow from your IRA, but you must repay the loan within 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.  Under recently passed legislation, you can only take one of these 60 day loans once per year.

What If You Need The Money For More Than 60 Days?

If you need money for more than 60 days, consider other options.  First, if you have a 401k, you may be able to borrow from that account under far more lenient conditions.  In most cases, you have 5 years to repay the loan.  Check with your HR department before doing anything.

If that isn’t an option, how about hitting up friends and family?  I know you may cringe at this idea but if you have the right mindset and approach, it could work out to be a win-win for both of you.  Your job is to convince your loved ones that this isn’t a gift and you are going to pay them back.   You communicate your commitment by showing up with a debt repayment play.  Demonstrate how you’re going to pay them back by giving them your financial reports.  Show them on black and white how much you earn and how much you spend and how much you have available to pay them back.  Offer to set up an auto debit so their monthly payment goes right into their checking account each month automatically.  Finally, come prepared with a formal loan document that proves how seriously you take your responsibilities.

If this isn’t an option you can always consider using a peer-to-peer lending company.  You can easily arrange a 12 to 36 year month loan (and in some cases 60 month loan) as long as your credit is decent.  And if you have a few marks on your credit score, it still doesn’t hurt to give them a try.

Bottom line?

Borrowing from your IRA is a very dangerous move.  Don’t kid yourself.  If you are 100% sure you can put the money back in the account within 60 days, it might be OK.  But once you start putting your fingers in that IRA cookie jar, you might be opening Pandora’s Box.  If you need the money for an investment, it might be investment you don’t need to make.  If you need the cash for an emergency, look for other options – any other option.   But at the end of the day, if you do use your IRA money, please be aware of the tax consequences and the precedent you might be setting up.

photo credit; Flikr, Epidemics