Can I Borrow From a Roth IRA?

How To Access Your Roth IRA Funds Early

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Roth IRAs (individual retirement accounts) are qualified retirement accounts that allow your savings to grow tax-free until retirement. Because the contributions to the account are taxed, unlike other qualified retirement accounts, there is no tax or penalty if you want to withdraw them.

You can withdraw contributions any time, but investment earnings are typically not available without penalty until you turn 59 ½. Still, there are a few ways to access those earnings, and we’ll discuss them in detail here.

Key Takeaways

  • You can’t borrow directly from a Roth IRA then return the funds.
  • You can make tax-free withdrawals on contributions at any time if you need to access your money before retirement.
  • You can make early withdrawals of investment earnings under a few circumstances, such as if you’re using the money to buy your first home.

Only 401(k) Plans Offer Loans

You can’t borrow from a Roth IRA. The only qualified retirement plans that offer loans to investors are employer-sponsored plans such as 401(k)s. Of course, with this loan, you’re technically borrowing from yourself, but you are accessing the money in the account without penalty.

403(b) (nonprofit employers) and 457(b) (government employer) plans generally have the same rules as 401(k) plans regarding loans.

Depending on the specific rules of the plan with your employer, you can borrow as much as $50,000 or half of the account over a 12-month period. You typically have to pay the loan and interest back within five years, unless the funds are used to buy your main home.

Roth IRA Contributions Can Be Withdrawn Anytime

Even though you can’t take a loan from a Roth IRA, the funds are accessible. In fact, the ability to withdraw contributions from Roths without penalty makes Roths among the most flexible of the qualified retirement plans.

You don’t need to pay taxes on your withdrawals because the money has already been taxed as income before you contributed. You can use the money for withdrawals for whatever you need, from buying real estate to starting a business.

If you’re currently maxing out a 401(k) but want to save more for retirement, consider adding a Roth in case you need the contributions in the future.

Technically, you can’t borrow from or withdraw unqualified distributions from a Roth, but there is one loophole for short-term needs: rollovers. When you roll over a Roth to a new account, you receive a check for the account balance that must be deposited into the new account within 60 days. You can use that money for 60 days, Matthew Benson, a Certified Financial Planner with Sonmore Financial, told The Balance in an email. This strategy is risky because you could face a 10% penalty if you don’t make the second deposit in time.

Qualified Early Withdrawals From Roth IRAs

While you can withdraw your Roth IRA contributions at any time, you typically must wait until you are older than age 59½ and have had the account for five years before withdrawing any tax-free earnings on your investments.

However, you can withdraw investment earnings from a Roth early under the following circumstances:

  • You are disabled.
  • You’re using up to $10,000 to purchase your first home.
  • You are the beneficiary of a deceased IRA owner.
  • You have medical expenses totaling more than 7.5% of your AGI
  • You’re paying medical insurance premiums while unemployed.
  • You’re paying an IRS tax levy.

Tax Penalties for Unqualified Roth IRA Distributions

If you distribute investment earnings from your Roth for any reason other than what is described above, you’ll be liable for a 10% tax penalty.

You’ll also be charged the penalty if you are 59½ or older and make a distribution after fewer than five years from the account’s start date.

How To Withdraw From Roth IRAs

Withdrawing from a Roth IRA is straightforward, typically as simple as transferring the money out of the account into a checking account.

You’ll need to file an IRS Form 8606 for the tax year that you make the withdrawal, to declare how much has been withdrawn and if it was from your contributions or from investment earnings.

Frequently Asked Questions (FAQs)

When can you withdraw from a Roth IRA tax-free?

You can withdraw your contributions to a Roth IRA anytime, but there are rules regarding when you can withdraw your earnings on your investments. For earnings, you’ll need to follow the 5-year rule and be 59½ or older, or meet certain requirements such as being disabled or buying your first home.

What is the difference between Roth IRA withdrawals and traditional IRA withdrawals?

The main difference is that you can withdraw contributions without additional tax from a Roth. Traditional IRA contributions can be withdrawn without the 10% penalty, but because they are made pretax, you’ll have to report the withdrawal as income on your tax return and pay taxes at your marginal rate.

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