A self-directed IRA is a versatile account in which to save for retirement, but most of the time, you can't use it for a loan. In fact, IRS guidelines make it plain: "If the owner of an IRA borrows from the IRA, the IRA is no longer an IRA, and the value of the entire IRA is included in the owner's income."
Under some circ*mstances, you can use a self-directed IRA (or any IRA) to take out the equivalent of a short-term personal loan. This involves taking advantage of a loophole in a different rule, known as the 60-day rollover rule. There are, however, several restrictions to keep in mind.
Key Takeaways
- Unlike with 401(k) plans, you can't take a loan from any type of IRA.
- You may be able to take advantage of a rollover rule loophole, which gives you 60 days to use the money as a short-term loan.
- If you don't pay it back on time or trigger other restrictions, you will lose the tax-favored status of the account and be subject to a penalty, too.
Understanding the 60-Day Rollover Rule Loophole
Unlike a 401(k) retirement account, qualified individual retirement accounts (IRAs), including self-directed IRAs, don't let retirement savers pledge their account collateral against a personal loan.
There is, however, one notable exception to this limitation: if you only need the money for a short period of time, specifically 60 days or less. There is a loophole where you can take advantage of the rollover rule, which is normally intended to facilitate the time to roll over one retirement account to another.
The IRS allows you to withdraw money from your IRA if you redeposit it in a qualified retirement account within the next 60 days. This could be the same IRA or a new one.
IRA Rollover Withdrawal Example
For example, if you need $4,000 to help pay for a child's tuition this month, but you won't get paid again until next month, you could withdraw the money from your IRA and use it as a short-term loan and simply replace it once you get paid.
If you don't follow the 60-day rule to the letter, however, not only will the funds be subject to income tax, you'll also pay a 10% early withdrawal penalty if you are younger than 59½.
You are allowed only one IRA rollover in any 12-month period, which means you can't simply borrow money from your IRAagainafter 60 days have passed.
Alternatives to Borrowing from Your IRA
If you can't borrow from your IRA, what can you do? First of all, if you need money in a pinch, it's always best to use assets that aren't already earmarked for retirement. But if you need the funds at any cost, you can evaluate the following options:
Workplace Retirement Plans
You might also have the option to borrow against balances in workplace retirement plans, such as a 401(k). Your plan must allow loans (not all of them do), and you’re taking several risks when you borrow. In addition to raiding your savings, you’ll have to pay taxes (and possibly penalties) if you aren't able to repay the loan. Consider what will happen if you change jobs before repaying in full.
It might even be possible to move funds from an IRA into your 401(k), increasing the amount of money you can borrow. Work with your HR department, financial planner, and tax advisor to understand the pros and cons of this technique.
Roth IRAs
Roth IRAs may be able to provide the funds you need via the same loophole, but (again), you’ll lose ground on your retirement goals. With a Roth, you may be able to take your contributions out (but not earnings) without triggering any tax liability, as contributions are made with after-tax dollars. Ask your tax preparer if that’s an option in your case, as a number of rules apply.
Unsecured Loans
To protect your retirement nest egg and minimize tax complications, it may be better to borrow elsewhere. Anunsecured loan(where you don’t pledge anything as collateral) may be all you need. Those loans are available frompeer-to-peer lending services, family members, and banks orcredit unions.
Can I Take a Loan from My Self-Directed IRA?
In most cases, no. It's possible you could use a self-directed IRA (or any IRA, for that matter) to take the equivalent of an emergency short-term personal loan. This would involve taking advantage of a loophole in a rule that applies to IRAs known as the 60-day rollover rule. But there are several restrictions to keep in mind.
What's the IRS 60-Day Rule That Applies to IRA Rollovers?
The IRS allows tax- and penalty-free rollovers from one tax-advantaged retirement plan or account to another, but only if you follow its 60-day rollover rule, which requires you to deposit all your funds into a new IRA, 401(k), or other qualified retirement account within 60 days of the distribution. If you fail to meet the 60-day deadline, your retirement funds will be subject to income taxes. And, if you're under 59½, an early withdrawal penalty will also be assessed.
Can I Borrow from My Roth IRA?
With a Roth IRA, you may be able to withdraw your contributions (but not earnings) without triggering any tax liability, as contributions are made with after-tax dollars. Check with a financial planner or your tax preparer to see whether that’s a viable option, as a number of rules apply.
The Bottom Line
The IRS prohibits loans from all types of IRAs, including self-directed IRAs, but there does exist a loophole that will allow for the equivalent of a short-term loan. You may be able to take advantage of the rollover rule loophole, which grants 60 days to use the money as a short-term loan if you move it to a different retirement account. However, be aware that if you don't pay it back on time or you set off other restrictions, you will lose the tax-favored status of the account and also be subject to a penalty.
