What Are the Options for an IRA Loan?

Facts About IRA Loans

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When you need money, you might look to your retirement accounts as a source of cash -- possibly in the form of an IRA loan. Unfortunately, it’s not possible to borrow from your IRA (and maybe that's a good thing), but 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. It is always tempting to tap those funds, 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.

Is an IRA Loan Even Allowed?

No. Internal Revenue Service (IRS) rules dictate what you can do with IRAs, and those rules only allow 'distributions' from IRA accounts. A distribution happens when you take money out of a retirement account (without putting it directly into another retirement account), and it is generally irrevocable.

That said, tax laws are complex and constantly changing, so you should verify your options with a local tax professional. To begin your research online, review IRS Publication 590, and be sure to read IRS guidance on loans from retirement accounts here.

You might find this surprising. Many savers believe they can take loans from IRAs. In part, the confusion may come from the fact that you can borrow from other types of retirement accounts. For example, some 401k plans allow loans -- but IRAs simply do not, and they (generally) cannot be pledged as collateral when you apply for a loan.

3 Alternatives to Borrowing Against your IRA

If you can't borrow from your IRA, what can you do? Again, it's best to use assets that are not earmarked for retirement if possible. But if you need the funds, you can evaluate the following options:

60 day rollover: you might be able to use your IRA assets for a short period of time using a 60 day rollover.

You have to follow some strict IRS rules, but this technique can act like a short term IRA loan. Note that the IRS has made this strategy more difficult in recent years, so revisit the rules if it's something you've done in the past.

Other retirement plans: you might also be able to borrow against balances in company retirement plans such as 401k plans. Your plan must allow loans (not all of them do), and you’re taking a few risks -- including defaulting on the loan resulting in taxes and penalties. It might even be possible to move funds from an IRA into your 401k, increasing the amount of money you can borrow against. Work with your HR department, financial planner, and tax advisor to understand this technique.

Look elsewhere: a good option is to try to borrow elsewhere. An unsecured loan (where your retirement savings are not collateral) may do the trick. Peer to peer lending services, family members, and banks or credit unions are also good options.

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. Technically you won't borrow from the IRA.

Instead, you'll set up an entity, fund it with the savings in your IRA, and use that entity to buy an interest in the business. The process is extremely complicated and you should definitely discuss the strategy with a CPA before you go too far.

This isn't something you can do with the standard IRA that you open at your bank or credit union; 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 at least several thousand dollars to get set up, and you'll have to pay annual fees as well.

Of course, it's worth a reminder here that most startup businesses fail. If you use your IRA, you risk losing your income as well as your nest egg.