Can You Borrow From an IRA Penalty-Free?

Andrea Coombes
By Andrea Coombes 
Updated
Edited by Arielle O'Shea

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Can you borrow from an IRA?

No, you can't borrow money or take a loan from an IRA. That said, there are some ways to get money out of your traditional IRA or Roth IRA in a pinch. This includes if you're 59½ or older, if you qualify for an exception, if you have a Roth IRA, or if you can replace the money in 60 days or less. Here are the details for taking money out of an IRA without getting hit with a penalty:

If you’re 59½ or older, you can take money out of your traditional IRA, no problem and no penalty (if you deducted your original contributions, you’ll owe income taxes on the money you pull out). And as long as you’re at least 59½ and you’ve owned your Roth IRA for five years or more, you can take tax- and penalty-free Roth withdrawals of both contributions and earnings.

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If you qualify for an exception, you can take money out of your IRA without penalty, even if you’re not yet 59½ (for example, to buy your first house). Check out the traditional IRA withdrawal rules and the Roth IRA withdrawal rules to see if your reason for taking the distribution qualifies.

If you have a Roth IRA, you can take the money you’ve put into the account back out at any time, without a penalty or tax bill. But you have to be careful to withdraw only contributions, not investment earnings (such as dividends or interest you’ve earned on those contributions). If you pull out earnings early, you’ll likely owe a 10% penalty and income tax on that portion of the distribution.

If you can replace the money in 60 days or less, then a 60-day rollover might be the ticket for you. IRS rules allow you to roll money from one IRA to another one or back into the same IRA, as long as you do it within 60 days. During that time, you can do what you like with the money. It’s a somewhat complicated and risky maneuver, but as long as you follow the rules, you can get money out of your IRA without owing penalties or taxes.

» Read more about rollover IRAs

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Two big caveats with 60-day rollovers:

  • Your IRA provider may withhold 10% of your IRA money for taxes unless you tell it not to. When you put the money back within 60 days, you must be sure to deposit the full amount of the original balance, including the 10%. Otherwise, you’ll owe taxes and an early distribution penalty on the portion that was withheld.

  • You must get the money back into an IRA within 60 days or risk the 10% penalty and taxes.

However, there are a few very important things to consider before raiding your IRA:

  • The money in your IRA is for your retirement. Taking money out means sacrificing the investment gains you would have earned on that money.

  • There may be other alternatives you can explore. For example, a 0% interest credit card intro offer or a peer-to-peer loan might be an alternative. Or, check out NerdWallet’s personal loan calculator to see if a personal loan might work for you.

  • Did we mention that IRAs were specifically created for retirement savings? Perhaps it’s not surprising that lawmakers created strict rules around taking money out. Failure to follow the rules brings a hefty 10% penalty and usually an income tax bill, too. Proceed carefully. (Note: The vast majority of withdrawals from a traditional IRA will trigger taxes.)

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One more option: Borrow from a 401(k)

If you don’t have any other options, then a 401(k) is one type of retirement plan that often allows loans. That decision is made by the employer, so contact your plan administrator for details.

Keep in mind that when you make 401(k) withdrawals, you must pay the loan back or it will be counted as a distribution from the plan, which means paying a penalty and taxes. Also, if you leave your job, you’ll have to get the full loan amount into an IRA or other qualified plan by the next tax filing deadline or risk owing income tax.

Although Inflation and increases in the cost of living means your money many not go as far next year, consider weighing your options before pulling from retirement savings.

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