Can You Borrow Against an IRA? What Are Your Options?
If you need money, you may be tempted to borrow against your IRA since it might be one of your most valuable assets. Unfortunately, it’s not possible to get an IRA loan. However, you can do a few things that are similar if you really need cash.
Before you do anything, pause and reconsider dipping into your retirement savings. Those funds can be a significant source of money, but you'll thank yourself later if you can leave the money alone and find funding elsewhere. Things are not going to get any easier when you're older and have stopped earning an income.
When Can You Borrow From Your IRA?
IRS rules dictate what you can do with IRAs, and those rules allow only distributions from IRAs. These involve removing funds from a retirement account without putting them back quickly or moving them directly into another retirement account. It is generally irrevocable.
Many savers believe they can take loans from IRAs because you can borrow from other types of retirement accounts. For example, some 401(k) plans allow loans, but IRAs do not, and they typically cannot be pledged as collateral when you apply for a loan.
Alternatives to Borrowing Against Your IRA
Since you can't borrow from your IRA, there are alternatives worth evaluating depending on your needs and the reason for your loan:
- 60-day rollover: You might be able to use your IRA assets for a short period by using a 60-day rollover. You must follow strict IRS rules, but this technique is similar to a short-term IRA loan. Note that since 2015, the IRS has limited the number of times you can do this to once every 12 months, so revisit the rules if it's something you have not done in a while.
- Other retirement plans: You might have the option to borrow against balances in workplace retirement plans such as 401(k) plans. Your specific plan must allow loans, 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 are not 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 401k, increasing the amount of money you can borrow. Work with your HR department, financial planner, and tax adviser to understand the pros and cons of that technique.
- Roth IRAs: Roth IRAs may be able to provide funds you need, but you’ll lose ground on your retirement goals. With Roth, you may be able to take out your contributions without triggering any tax liability. Ask your tax preparer if that’s an option in your case.
- Look elsewhere: To protect your retirement and minimize tax complications, it may be better to borrow elsewhere. An unsecured loan (where you don’t pledge anything as collateral) may be all you need. Those loans are available from peer-to-peer lending services, family members, and banks or credit unions.
If you start by borrowing from a traditional lender, you still have the option to tap retirement savings later, if necessary. But if you go directly to your IRA for funding, it may be hard to undo the damage.
Investing in a Business
If you want to use assets in your IRA to invest in a business, you might be able to pull it off, but it's not easy.
Instead of borrowing from the IRA, you can establish an entity, fund it with the savings in your IRA, and use that entity to buy an interest in the business. The process typically involves setting up what is called a self-directed IRA, which is used to invest in real estate. The IRS has strict rules about the types of investments that are allowable, and it is important to consult with a financial adviser before pursuing this option.
You'll need to work with a firm that specializes in using IRAs to invest in businesses or real estate. If you go this route, expect to pay fees to get set up, and you'll have to pay annual fees as well.
If you use your IRA to invest in a business, you risk losing your income as well as your nest egg. As an alternative, you might be eligible for business loans backed by the U.S. Small Business Administration (SBA). Government backing makes it easier to qualify for loans and keeps borrowing costs low.
IRS. “Retirement Plans FAQs Regarding Loans.” Accessed March 7, 2020.
IRS. “Considering a Loan From Your 401(k) Plan?” Accessed March 7, 2020.
IRS. “Rollovers of Retirement Plan and IRA Distributions.” Accessed March 7, 2020.
IRS. “Topic No. 309 Roth IRA Contributions.” Accessed March 7, 2020.
IRS. “More in Retirement Plans.” Accessed March 7, 2020.
SBA. “The SBA Helps Small Businesses Get Loans.” Accessed March 7, 2020.