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An individual retirement account (IRA) is a savings account with tax advantages that is designed as a long-term investment vehicle. If you are wondering about getting an IRA loan, it’s important to know that it’s not possible to borrow against an IRA. Taking an early withdrawal from an IRA is an option, but that can come with taxes and penalties.

Read on to learn the impact of an early withdrawal from an IRA and some other ways to find the cash for unexpected expenses.

Can You Borrow From Your IRA?

There are strict rules around withdrawing money from traditional and Roth IRAs. IRA loans are not allowed. However, while you cannot borrow money from these accounts, you can withdraw cash from your IRA. If you are under age 59 ½, however, this is considered an early withdrawal and it comes at a cost.

What Is Possible: Early IRA Withdrawals

Instead of an IRA loan, which is not permitted, IRA account holders can take an early IRA withdrawal. But doing so can result in taxes and a 10% penalty, with some exceptions and depending on the type of IRA you have. Here’s what you need to know about early withdrawals from traditional and Roth IRAs.

Traditional IRAs

With a traditional IRA, you make contributions with pre-tax dollars and pay taxes on the money when you withdraw it.

If you are 59 ½ or older, you can take money out of your traditional IRA with no penalty, but you will owe income taxes on the money.

If you’re under age 59 ½, there are some exceptions that will allow you to avoid the additional 10% penalty, including:

First-time homebuyers can withdraw $10,000 for a down payment.

•  The funds are being used for higher education expenses.

•  The funds are for the birth or adoption of a child.

•  The account holder has become permanently disabled.

Roth IRAs

With a Roth IRA, you make after-tax contributions and withdraw the money tax-free in retirement. If you’re at least 59 ½ and you’ve owned your Roth IRA for five years or more, you can take tax- and penalty-free withdrawals from your Roth IRA.

However, if you are taking an early withdrawal from your Roth (before age 59 ½), you can take out your contributions tax- and penalty free, but not your earnings. If you withdraw earnings, such as dividends or interest, you might have to pay the 10% penalty plus income and state tax on that portion of the withdrawal.

Financial Impact of Early IRA Withdrawals

Taking an early withdrawal from an IRA typically has financial ramifications that it’s important to understand.

Penalties

When you take an early withdrawal from your IRA, you generally incur a penalty of 10% unless the money is for one of the exceptions noted above, or if you are withdrawing contributions (but not earnings) from a Roth IRA that you’ve owned for five years or more.

Taxes

In addition to the penalty you may face for an early withdrawal from your IRA, you will generally also owe taxes on the money you take out. With a Roth IRA, if you take out earnings, you will owe taxes on that money, but not on contributions.

Lack of Growth Potential

By taking money out of your IRA through a withdrawal, and thus lowering the amount in your account, you may lose out on future growth. Less money in your account means you are also decreasing the ability of that sum to generate returns.

This two-fold hit to your savings could impact your financial future. You might not meet your goals for retirement in terms of how much you have saved and what lifestyle you’ll enjoy, for example.

Alternative Funding Sources

There are alternatives to early withdrawals from an IRA. The best choice for you depends on how much cash you need, the taxes and penalties you might incur, and the interest and fees you may pay on the alternative. Here are some options to consider.

401(k) Loan

Unlike an IRA, borrowing from your 401(k) is allowed. (SoFi does not offer 401(k)s at this time, however we do offer a range of IRAs.) Depending on your 401(k) plan, you can take out as much as 50% of your savings, or as much as $50,000, whichever is less, within a 12-month period. You will have to pay back the money, plus interest, within five years. However, the interest is paid back into your own account.

The advantage of a 401(k) loan is that there are no taxes or penalties. The disadvantage is that if you leave your current job, you may have to repay your loan in full at that time. If you cannot, you’ll likely owe both taxes and a 10% penalty if you’re under 59 ½.

Family Loan

A family loan could be the best option if you can negotiate favorable terms. This alternative is also the most flexible, but it can affect family relationships if not handled well. Be sure to set expectations and draw up a contract to protect both parties.

While some people may be lucky enough to score a no-interest loan, most can expect to pay for this privilege of access to cash. However, you can likely avoid closing costs and the like. And, of course, you won’t face the taxes and possible penalties involved when taking an early withdrawal from an IRA.

Credit Card Cash Advance

A credit card cash advance is a quick way to get funds by borrowing against the credit limit on your credit card. No hard credit inquiry is required, so there is no effect on your credit score. You can pay small fixed monthly payments, but there will be interest that accrues daily as well as fees.

However, the potentially high interest charges (often higher than the standard credit card interest rate) and fees will need to be weighed against the cost of an early withdrawal from an IRA. There may be an additional charge of up to 5% for a cash withdrawal, as well as a flat charge for a withdrawal in addition to the percentage charge. Depending on your credit line, the amount you can withdraw may be less than your credit limit.

Personal Loan

If you are looking for a specific sum of money that you would like to repay over time, a personal loan could be a good choice. These usually unsecured loans can be used for almost any purpose (from affording a wedding to paying for home repairs) and are often funded quickly.

Current personal loan interest rates are generally much lower than for a cash advance on your credit and may be a better option than paying taxes and possibly penalties on an IRA withdrawal. Also, you will not be pulling from your retirement nest egg and lessening its opportunities for growth.

Recommended: Personal Loan Glossary

Early IRA Withdrawal vs. Personal Loan

Deciding between an IRA withdrawal vs. a personal loan when you need funds requires careful consideration. Here are the pros and cons of personal loans and early IRA withdrawals to help you weigh the choices and make an informed decision.

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Pros of Early IRA Withdrawal

There are several possible advantages to taking an early IRA withdrawal. These include:

•  You can access cash through an IRA withdrawal without paying interest or fees.

•  You may be able to avoid any early withdrawal penalties, depending on how the funds are used.

•  An IRA withdrawal may help you pay off high-interest debt.

•  If you have a Roth IRA, you can withdraw contributions (but not earnings) free of tax and penalties.

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Cons of Early IRA Withdrawal

While dipping into your IRA may seem like a good way to get money quickly, consider the downsides before doing so.

•  You will likely owe taxes and possibly an early withdrawal penalty.

•  Withdrawing funds from your IRA can take a chunk out of your retirement savings.

•  If you withdraw earnings from a Roth IRA, you may have to pay taxes and fees.

•  You’ll miss out on earnings from the amount you withdraw from your IRA, which could have a negative impact on your retirement savings.

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Pros of a Personal Loan

A personal loan provides flexible borrowing when you need access to cash. Here are some of the other potential benefits:

•  Personal loan funds can be used for virtually any purpose, including home improvement loans.

•  Interest rates on personal loans are typically lower than those of credit cards.

•  You can get funding quickly, typically within days.

•  You may choose from personal loans with fixed or variable interest rates.

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Cons of a Personal Loan

Along with their possible advantages, personal loans do have some drawbacks to keep in mind. These are a few to think about:

•  You will likely need to meet certain personal loan credit score requirements to get the best interest rates. The higher your score, the lower your interest rate may be.

•  There may be loan fees to pay on a personal loan, such as an origination fee, which covers the loan processing.

•  Taking out a personal loan can increase the amount of debt you have.

•  Repaying a personal loan could mean that you have less money to devote to savings for other goals, such as buying a house.

The Takeaway

IRA loans are not allowed. You can make an early withdrawal from an IRA instead, but that typically comes with taxes and possibly a 10% early-withdrawal penalty. An IRA withdrawal also subtracts money from your retirement savings.

Alternatives to an early IRA withdrawal include a 401(k) loan, a credit card cash advance, borrowing from family, and a personal loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can I take a loan from my IRA?

There is no such thing as an IRA loan. You can take an early withdrawal from an IRA, but that may involve paying taxes and a penalty, depending on the type of IRA you have, your age, and what you are using the money for. For instance, a first-time homeowner can typically avoid the IRA 10% early withdrawal penalty if they are taking out $10,000 or less for a down payment

How do I get an IRA loan?

You can’t borrow from your IRA. However, if you’re 59 ½ or older, you can take a withdrawal from your traditional IRA without any penalty. Since your original contributions were tax-deductible, you’ll need to pay income tax on the funds you withdraw.

If you have a Roth IRA, you can withdraw both contributions and earnings tax-free and penalty-free if you are 59 ½ or older and have owned your Roth IRA for five years or more. If you withdraw earnings early, you’ll have to pay a 10% penalty and income tax on the amount you withdraw.

How long do you have to pay back an IRA loan?

There is no such thing as an IRA loan. However, one workaround is to do a 60-day rollover. This isn’t a loan, but it may function similarly to a loan as long as you can use the money quickly and then replenish it within the 60 day time frame.

To do a 60-day rollover, you need to withdraw funds from your IRA and roll them over into another IRA or retirement plan, or even back into the same IRA, within 60 days to avoid paying taxes or penalties. If you don’t roll over the funds within 60 days, you will have to pay taxes plus possibly an additional 10% penalty.

Can I borrow from my Roth IRA without penalty?

You can withdraw contributions you’ve made to a Roth IRA at any time without penalty or taxes. Just be sure not to also withdraw any earnings, such as dividends and interest. The reason: You would owe a 10% penalty plus income taxes on the earnings portion of the withdrawal.

How can I get my money out of my IRA without penalty?

You can get money out of your IRA without penalty if you’re 59 ½ or older. (If you have a traditional IRA, you will owe taxes on the money you withdraw; if you have a Roth IRA that you’ve owned for at least five years, you won’t owe taxes.)

If you’re under age 59 ½, there are some exceptions that allow you to avoid the 10% penalty for early withdrawal, including if you are a first-time homebuyer, you’re using the funds for higher education expenses, the funds are for the birth or adoption of a child, or you have become permanently disabled.

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Margin trading and options trading are two strategies that incorporate leverage, which investors may use when investing in the financial markets. But they are quite distinct, and each strategy uses leverage in a different way.

Margin trading refers to the use of borrowed funds to place bigger securities trades than investors can afford with available cash.

Options are a type of derivative, where the option contract represents shares of an underlying security. Trading options can also be a type of leveraged trade, because an investor can control a large position with a relatively small investment via the premium (the cost of each option contract).

In some cases, you need a margin account to provide collateral for certain options trades. But with some options strategies the underlying stock can serve as collateral.

Depending on the types of trades involved, both margin trading and options trading have the potential for bigger gains, but these strategies entail the potential for steep losses — including the possibility of loss that exceeds the initial investment.

Options Trading vs Margin Trading

Options trading and margin trading have some similarities, although they are fundamentally different in most ways.

Similarities

Here are some similarities between margin trading and options trading:

•   Leverage: Both options trading and margin trading allow you to use leverage to amplify your position, though in different ways.

•   Higher risks and rewards: Both strategies can yield higher returns if the trades move in the right direction, but they also carry the risk of losses that can exceed your initial investment, in some cases.

•   Requires broker approval: Margin and options trading both require additional account approvals, since these strategies come with significant risk exposure.

Differences

Here is a look at the differences between options trading and margin trading:

•   Fundamentally, options are a type of security. Margin is a strategy for using debt (i.e., margin loans) to buy more shares — it’s not a type of investment.

•   How leverage is achieved:

◦   Margin allows you to borrow money to purchase more securities than you could with cash.

◦   Options are derivatives contracts that represent 100 shares of the underlying stock or security, for the price of the contract (a.k.a. the premium), which is a smaller amount than the cost of owning the shares

Options Trading and How It Works

Options are financial derivatives that allow an investor to control shares of a particular security without needing the full amount of money required to buy or sell the asset outright.

The purchaser of an options contract has the right to buy or sell a security at a fixed price within a specific period of time, paying a premium for that right.

There are two main types of options contracts: call options and put options. A call option gives the purchaser the right — but not always the obligation — to buy a security at a specific price, called a strike price. In contrast, the purchaser of a put option has the right — but again, not always the obligation — to sell a security at the strike price.

Buying and selling call and put options are two ways investors can potentially use leverage to accelerate their gains. And since options contracts fluctuate in value, traders can buy or sell the contracts before expiration for a profit or loss, just like they would trade a stock or bond.

Bear in mind that these investments carry significant risks, especially since you need to repay the margin loan, with interest, regardless of outcome.

Recommended: Options Trading 101: An Introduction to Stock Options

How Does Options Trading Work?

Suppose a stock is trading at $40 per share. If you buy the stock directly and the stock price goes to $44, you will have made a 10% profit.

However, you could also buy a call option for the stock. Say that a call option with a strike price of $40 for this stock is selling for a $1 premium. When the stock price moves from $40 to $44, the call option premium might move to $2. You could then sell the call option, potentially pocketing the difference between the price of the option when you sold it and what you paid for it ($2 – $1).

This example assumes the option price has increased. If the price decreases, you may incur a loss, which could include the entire premium paid.

There are many ways to trade options, depending on your outlook on a particular asset or the market as a whole. Investors can utilize bullish and bearish options trading strategies that target short- and long-term stock movements, allowing them to make money in up, down, and sideways markets.

Aside from speculating on the price movement of securities, investors can use options to hedge against losses or generate income by selling options for premium.

Recommended: How to Trade Options: An In-Depth Guide for Beginners

Pros and Cons of Options Trading

Here are some of the pros and cons of options trading:

Margin Trading and How It Works

Margin trading is an investment strategy in which you buy stocks or other securities using money borrowed from your broker to increase your buying power. This strategy can potentially enhance returns, but it can also magnify your losses.
In contrast, when you buy a stock directly, you pay for it with money from your cash account. Then, when you sell your shares, your profit (or loss) is based on the stock’s current price versus what you paid.

This traditional way of investing limits gains, at least compared to margin trading, but also curbs potential risk: you can only lose as much as you invest.

If you want to start trading on margin, you’ll likely need to upgrade the type of account you have with your broker. There are significant differences between a cash and margin account, and only qualified investors can access margin funds.

How Does Margin Trading Work?

After your broker approves you for a margin account, you can buy more stocks than you have cash available. Your broker will require both an initial margin amount and a maintenance margin amount.

Margin Trade Example

Here’s one example of how margin trading works: suppose that you have $5,000 in your account, and you want to buy shares of a stock that’s trading at $50 per share. With a regular cash account, you would only be able to buy 100 shares ($50 x 100 shares = $5,000).

If the stock’s price goes up to $55, you can close your position with a 10% profit.

With a margin account, you borrow up to 50% of the security’s price. If your broker has approved you for a $5,000 margin loan, you now have $10,000 in buying power; so you can buy 200 shares of the stock at $50 per share. If the stock’s price goes up to $55 in this example, your profits will be higher. You can sell your 200 shares for $11,000.

Then, after repaying your margin loan of $5,000, you still have $6,000 in your account, representing a 20% profit. (This hypothetical example does not include the cost of interest on the margin loan or any fees.)

But keep in mind that the increased leverage works in both directions. If you buy a stock on margin and the stock’s price goes down, you will have higher losses than you would if you just purchased with your cash account.

If you enter into a margin position and the value of your account drops, your broker may issue a margin call, and force you to either deposit additional cash or sell some of your holdings (if you fail to cover the shortfall, the broker can sell securities in your account to do so).

Pros and Cons of Margin Trading

Here are some of the pros and cons of margin trading:

How to Decide Which Is Right for You

Both options and margin trading can be successful investment strategies under the right conditions.

You may consider margin trading if you want to enhance your buying power with additional capital. If you want a type of investment with more flexibility, options trading might be suitable for you.

In either case, make sure you manage your risk so that you aren’t put in a situation where you lose more money than you are comfortable with.

The Takeaway

Options and margin trading are just two of the many investing strategies investors can consider when exploring ways to incorporate leverage. While investors are not able to sell options or covered calls on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Experienced traders may find either margin or options trading to be a worthwhile part of their portfolio, depending on their risk tolerance and goals.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

Is margin trading better than options trading?

Neither one is necessarily better than the other. Both options trading and margin trading can make sense in specific situations. Remember that options are a type of derivative, which is a type of investment. Margin is a trading strategy that relies on debt to increase a position. The two can overlap because there are some options trades that require a margin account for collateral.

How much margin is required to buy options?

Margin is not required to buy or sell options contracts. However, you may use a margin loan to provide collateral for options trading, if it’s appropriate.

Are options trading and margin trading the same thing?

Both options and margin trading allows you to use leverage to potentially increase your returns, but they are not the same. Options trading involves trading options contracts, while margin trading involves borrowing money from your broker to make investments with more cash than you have in your account.

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