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.
Key Points
• IRA loans do not exist; IRA funds can only be taken as withdrawals from an account.
• Withdrawals from traditional IRAs before age 59 ½ incur taxes and penalties.
• Roth IRA contributions can be withdrawn tax-free and penalty-free as long as the IRA has been open for at least five years.
• Alternatives to early IRA withdrawals include family loans, credit card advances, 401(k) loans, and personal loans.
• Personal loans are flexible and can be used for almost any purpose. A borrower’s credit score typically affects the interest rate they get.
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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