Adam Bergman

Founder, Tax Lawyer, Author

One of the most common questions I get from clients is whether they can borrow from an IRA when they need cash. The answer is no. Unlike a 401(k), an IRA has no loan feature, and trying to create one can wipe out the tax benefits of your entire account. There are still some legitimate ways to get at retirement money without a full taxable distribution, and knowing the difference can save you thousands.

Can You Borrow From an IRA?

No. You can’t take a loan from any type of IRA. That includes:

• Traditional IRA
• Roth IRA
• SEP IRA
• SIMPLE IRA

The IRS states plainly that IRAs and IRA-based plans can’t make participant loans. A 401(k) plan works differently. IRC Section 72(p) lets qualified plans offer participant loans, and IRC Section 4975(d)(1) exempts those loans from the prohibited transaction rules. Congress never gave IRAs a similar exemption.

What Happens If You Borrow From Your IRA Anyway

The penalty is severe. Under IRC Section 4975(c)(1)(B), lending money between an IRA and its owner is a prohibited transaction. Under IRC Section 408(e)(2), if the IRA owner engages in a prohibited transaction, the account stops being an IRA as of the first day of that year. The IRS treats the entire account as distributed. That means income tax on the full balance, and a 10% early distribution penalty if you’re under age 59 1/2. It doesn’t matter if you only borrowed a fraction of the account. The whole IRA is lost.

Pledging your IRA as collateral is also a problem. Under IRC Section 408(e)(4), if you use any part of your IRA as security for a loan, that portion is treated as distributed to you. I’ve seen people sign personal loan documents that pledged their retirement accounts without realizing it. Read the fine print before you sign any loan agreement.

The 60-Day Rollover: Short-Term Access, Not a Loan

The only way to get temporary use of IRA money is the 60-day rollover. You can withdraw money from your IRA and put it back within 60 days without tax or penalty. Some people use this as a short-term, interest-free bridge, but it comes with strict limits:

• One per 12 months. Under the IRS one-rollover-per-year rule, you can do only one IRA-to-IRA rollover in any 12-month period, across all of your IRAs. That includes Traditional, Roth, SEP and SIMPLE IRAs. The limit doesn’t apply per account, and the period is a rolling 12 months, not a calendar year. The IRS adopted this aggregate approach after the Tax Court’s decision in Bobrow v. Commissioner.
• Miss the deadline and it’s a distribution. If the money isn’t back in an IRA by day 60, the full amount becomes a taxable distribution. If you’re under 59 1/2, you’ll also owe the 10% early withdrawal penalty.
• A second rollover can backfire. If you try a second rollover within 12 months, the money is taxable. If you deposit it anyway, it can be treated as an excess contribution, subject to a 6% tax every year it stays in the IRA.
• Withholding can complicate repayment. If the IRA custodian withholds federal tax from the distribution, you need to replace that amount from other funds to roll over the full balance.

Direct trustee-to-trustee transfers and Roth conversions don’t count toward the one-per-year limit. Still, the 60-day rollover isn’t a borrowing strategy, and the IRS doesn’t intend it to be used as one. If you’re not certain you can put the money back in time, don’t use it.

https://youtu.be/SXlLsJGUf3Y

Borrowing From a 401(k) Instead

If you have a 401(k), you may be able to borrow from it legally. The ability to take a participant loan is one of the biggest advantages a 401(k) has over an IRA.

How a Solo 401(k) Loan Works

If you’re self-employed or own a business with no full-time employees other than yourself, a business partner or a spouse, you can open a Solo 401(k). As long as the plan documents allow it, a Solo 401(k) participant can take a loan under IRC Section 72(p). Here are the key rules:

The interest goes back into your own retirement account, not to a bank. That’s why I like the Solo 401(k) loan so much for business owners who need liquidity. You’re paying yourself instead of a lender. I walk through the details in The Definitive Guide to the Solo 401(k) Participant Loan. I also explain how it can replace high-interest debt in How the Solo 401(k) Loan Can Save You Thousands in Credit Card Interest.

Be aware that a defaulted loan has real consequences. If you miss payments and don’t fix them within the plan’s cure period, the outstanding balance becomes a deemed distribution. That means income tax, plus the 10% penalty if you’re under 59 1/2. Also, not every Solo 401(k) includes a loan feature. Many of the free plans offered by large brokerage firms don’t. IRA Financial’s Solo 401(k) plan documents include the participant loan provision.

Rolling an IRA Into a Solo 401(k)

This is the strategy many people miss. If you’re eligible for a Solo 401(k), you can generally roll pre-tax IRA funds, including Traditional, SEP and SIMPLE IRA money (once you’re past the SIMPLE’s two-year period), into the Solo 401(k), as long as the plan accepts rollovers. Once those funds are in the 401(k), they count toward your vested balance and can support a participant loan. You can’t legally borrow from an IRA, but this lets you get to the same money the right way. Roth IRA funds can’t be rolled into a 401(k), so this strategy only works with pre-tax dollars.

If you already have an employer 401(k) that allows loans, taking a loan from that plan can be just as tax-efficient.

Taking Money Out of an IRA Is a Distribution

If you need IRA funds for personal expenses, such as paying off debt, covering tuition or buying a home, taking money out of the IRA is a distribution. Distributions have tax consequences, and they permanently cut into the future tax-advantaged growth of your retirement savings. Before you take one, understand how it will be taxed and look at the alternatives.

How IRA Distributions Are Taxed

Traditional IRA:

• Withdrawals before age 59 1/2 are generally subject to ordinary income tax plus a 10% early withdrawal penalty, unless an exception applies.
• After age 59 1/2, ordinary income tax still applies, but the 10% penalty doesn’t.

Roth IRA:

• Your contributions can always be withdrawn tax-free and penalty-free, since they come out first.
• If you withdraw earnings before 59 1/2, you’ll generally owe income tax and the 10% penalty, unless an exception applies.
• If you’re past 59 1/2 but your Roth has been open less than five years, earnings are subject to income tax but not the penalty.
• Qualified distributions, meaning you’re 59 1/2 or older and your first Roth IRA has been open at least five years, are completely tax-free.

Exceptions to the 10% Early Withdrawal Penalty

If you have to take money out of an IRA before 59 1/2, check whether an exception to the 10% penalty applies. Income tax generally still applies to pre-tax money, but avoiding the penalty makes a real difference. Under IRC Section 72(t), the IRS lists exceptions that apply to IRAs, including:

The emergency personal expense, domestic abuse and birth or adoption exceptions came from the SECURE Act and SECURE 2.0. Some of these distributions can also be repaid to the IRA within a set period.

Substantially equal periodic payments, often called 72(t) or SEPP distributions, deserve a word of caution. You take a series of payments calculated on your life expectancy. Once you start, you generally have to keep them going for five years or until you reach 59 1/2, whichever is later. If you change or stop the payments early, the IRS can apply the 10% penalty retroactively to every payment you’ve taken, plus interest.

IRAs don’t have “hardship distributions.” That’s a 401(k) concept. With an IRA, you can withdraw money at any time. The question is whether income tax and the 10% penalty apply.

Final Thoughts

You can’t borrow from an IRA, and trying to treat one like a piggy bank can cost you your entire account. If you need short-term liquidity, a 401(k) loan is almost always a better path than a 60-day rollover or an early distribution. For self-employed investors, rolling pre-tax IRA funds into a Solo 401(k) can make that loan possible. If a distribution can’t be avoided, knowing the penalty exceptions can keep more of your money working for you. Take the time to weigh the options before you touch your retirement savings, because a withdrawal can’t be undone.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.