Can You Borrow Against an IRA? What Are Your Options?
Your retirement account might be one of your most valuable assets. So if you need money, you may be tempted to borrow against your IRA. Unfortunately, it’s not possible to get an IRA loan (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. 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.
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 IRAs. A distribution happens when you take money out of a retirement account (without putting it back quickly or moving it directly into another retirement account), and it is generally irrevocable.
You might find this surprising. Many savers believe they can take loans from IRAs. In part, the confusion comes from the fact that 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
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 at any cost, you can evaluate the following options:
60-day rollover: You might be able to use your IRA assets for a short period using a 60-day rollover. You have to follow strict IRS rules, but this technique is similar to a short-term IRA loan. Note that the IRS made this strategy more difficult in 2015, so revisit the rules if it's something you've done in the past.
Other retirement plans: You might also have the option to borrow against balances in workplace retirement plans such as 401(k) plans. 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 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 (again), you’ll lose ground on your retirement goals. With Roth, you may be able to take your contributions out 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.
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 commit to anything.
This isn't something you can do with a 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. 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 Feb. 19, 2020.
IRS. “Considering a Loan From Your 401(k) Plan?” Accessed Feb. 19, 2020.
IRS. “Rollovers of Retirement Plan and IRA Distributions.” Accessed Feb. 19, 2020.
IRS. “Topic No. 309 Roth IRA Contributions.” Accessed Feb. 19, 2020.
American Express. "How to Use Your IRA to Fund Your Business." Accessed Feb. 19, 2020.
IRS. “More in Retirement Plans.” Accessed Feb. 19, 2020.
SBA. “The SBA Helps Small Businesses Get Loans.” Accessed Feb. 19, 2020.