No, you can’t borrow from an IRA. But you have other options

Unfortunately, you can’t borrow money from traditional or Roth IRAs the way you can borrow from some 401(k) plans.

That doesn’t mean you’re out of luck. You still have options to tap into your IRA early without triggering a penalty or tax event. That includes short-term rollover distributions and withdrawing contributions from a Roth IRA. 

Your individual retirement account isn’t the only valuable asset you can cash out, either. Learn more about why you can’t borrow from an IRA, and alternatives to consider, below. 

Why can’t you take an IRA loan?

You just can’t – the IRS says so. Borrowing from any type of IRA, including SEPs, SARSEPs, and Simple IRAs, isn’t permitted. 

“Borrowing” money from the account would invalidate the IRA, and you can’t replace any money you withdraw from the account. Instead it would be considered a distribution, which means you owe income taxes and a 10% early withdrawal fee if you’re not 59½ or older. 

You really don’t want to pay 10% on a large withdrawal — that’s a huge hit to your retirement. 

While you can’t borrow from your IRA, but there are ways to withdraw money without penalty.

Option #1: Check if you qualify for an early withdrawal exception

The general rule is to pay a 10% early withdrawal penalty on any IRA withdrawals you made before turning 59½ years old. But the IRS has a list of exceptions that qualify you for penalty-free distributions. 

While this is a penalty-free way to access your IRA funds, it might be difficult to make up the lost funds with new contributions if you withdraw a large sum. That means the withdrawal will throw off your retirement growth if you don’t adjust your plans accordingly.

These are the most tax-friendly ways to access your IRA funds, but you have to prove your circumstances with documentation. For example, receiving Social Security disability income verifies your disability status and qualifies you for penalty-free withdrawals. 

Option #2: Take an early withdrawal and pay the penalty

There’s no rule saying you can’t access your IRA funds, but early distributions aren’t free. If you absolutely need the funds, you can make an IRA withdrawal and pay the required income taxes and 10% early withdrawal penalty (if you’re under 59½).

We really don’t recommend early withdrawals since both the distribution and excess charges significantly reduce your account balance. Any time you tap into your IRA balance, you reduce investment earnings and compound interest growth. 

If you’re already pretty close to retirement age and at least 59½, you can withdraw money without the 10% penalty. Instead, you’ll owe income taxes on everything you take out. Regardless, we recommend you consult an advisor to make sure your retirement stays on track. 

Option #3: Consider accessing a Roth IRA

If you have a Roth IRA, you can access your contributions penalty- and tax-free. 

Earnings on your investments are eligible for penalty-free distributions once you reach 59½ years old and have owned the account for at least five years.

Roth accounts take after-tax contributions, which allows you to access your contributions without any tax implications, so they’re usually best early in your career when your tax rate is relatively low. And income limits on funding Roth IRAs mean not everyone qualifies to contribute. 

You still need to report contribution-only withdrawals to the IRS. Your brokerage will send you a 1099-R form with the details come tax season, then you can pass the information on with your taxes.

Option #4: Try a short-term distribution with a 60-day rollover

There are two types of IRA rollovers – direct and indirect. If you’re rolling over an account, we always recommend direct rollovers because you never handle the money yourself and never risk owing taxes and penalties. 

In the case where you want to tap into that cash, an indirect rollover can help you out. However, it’s extremely tricky to execute without triggering taxes or penalties. You have to meticulous with your paperwork and timing. 

With an indirect IRA rollover, your provider sends you a check to transfer the funds from your old retirement account to a new one. A 60-day countdown begins when you receive the money, and that’s your time limit to deposit the funds in a new account before you have to pay taxes and the 10% fee. 

Theoretically, you have 60 days to “borrow” the cash, use it where you need it, and then replace the funds into a new IRA. If you can swing it, you’ll avoid expensive fees without derailing your retirement plan too much (you will miss out on investment earnings while you hold the cash).

But it’s a risky move. Miss the 60-day deadline and you’ll owe income taxes on the distribution, plus a 10% early withdrawal penalty on the full distribution. 

Option #5: Regular distributions with a SoSEPP

The IRS also permits a series of substantially equal periodic payments (SoSEPP) – a process that provides regular, penalty-free IRA distributions for up to five years or until you turn 59½ years old. 

You have to start the payments before you’re 59½, and you can’t adjust your withdrawal schedule or take any additional distributions without disrupting the arrangement and triggering penalties. 

The IRS has a few ways to determine your payments, including:

• Amortization: Annual payments are the same each year based on life expectancy.
• Annuitization: Annual distributions are the same each year and determined with an annuity based on your age. 
• RMDs: Annual payments vary and are determined by your account balance divided by your life expectancy.

We advise against this option since you can’t continue contributing during this period, and it will deplete your existing retirement fund. Plus, once you begin SoSEPP, you have to see it through or else you owe all of the penalty fees and interest you’ve been avoiding. 

But if you’ve run into financial hardships and are between jobs or otherwise need regular income, this can help you get by. 

Option #6: Borrow from a 401(k)

If you have a 401(k) plan, your employer might allow 401(k) loans. You’ll have to confirm with your HR team and plan administrator before applying. 

Generally you can borrow up to 50% of your vested balance up to a maximum withdrawal of $50,000, but employers can also set their own limits. 

If you take out a 401(k) loan, you’ll have five years to repay the borrowed balance with interest, unless your employer has a separate repayment timeline. Your repayment and interest go back into your personal 401(k), so your retirement plan stays intact. 

This isn’t a risk-free option. If you leave your employer, that five-year timeline is cut, and you have to repay the balance in full sooner. Failure to repay in either scenario triggers income taxes on the distribution, as well as a 10% early-withdrawal penalty. 

Like an IRA, even if you can’t get a loan, there are other ways you can tap into your 401(k). 

Option #7: Explore other credit lines

Your retirement investments likely aren’t your only source of quick cash, and experts usually caution against taking money from retirement accounts early unless it’s absolutely necessary to avoid a crisis or heavy debt. 

If you can’t tap into your IRA funds, consider using credit.

• Personal loan: Take out a personal loan from a bank and repay it. The  average interest rate is 12.35% as of quarter four, 2023. 
• Home equity: Borrow against your home’s equity with a home equity loan (fixed rates) or home equity line of credit (HELOC – variable rates) with average interest rates around 8% to 9%.
• Credit cards: For short-term, relatively small amounts, consider using your credit cards. But make sure you can repay quickly because the average credit card interest rate is 21.47% in Q4, 2023.‍
• Peer-to-peer loans: These are direct loans between you and someone else. Since you cut out the middleman, you can find more favorable rates, but they vary widely from 4%-26% based on your creditworthiness.

The Playbook take: Avoid tapping into your retirement altogether

Your retirement strategy works best when you continue to invest and leave the funds alone to earn dividends and compound interest. But we understand life doesn’t always fit into your well-packaged retirement plan, and sometimes you need to tap into your reserves. 

While you can’t borrow money from your IRA, there are other ways to access the funds in a pinch. You can also take loans from your 401(k), withdraw contributions from a Roth IRA, or utilize other available lines of credit. 

Want to organize your tax-advantaged accounts and figure out which to prioritize for your goals? See how Playbook can revolutionize your retirement with a tax strategy that works. 

‍