When you’re building for retirement, an IRA is one of the best assets you can have in your portfolio. But can it help if you need money now? Taking money out of your IRA before retirement is possible, but it’s best you know what to expect before seriously considering it as an option.
Can you borrow from your IRA?
As for whether you can actually borrow from an IRA or not, Andrea Coombes of NerdWallet says the short answer is no. You can withdraw money from your IRA before retirement age, but it’s not the same as taking a loan out against your retirement like you could with a 401(k). That means whatever withdrawals you make will be taxed and are subject to penalties.
The closest thing to an IRA loan, Coombes notes, is a 60-day rollover option. This would require you to roll the money in your IRA over into a new or the same account. In order to do this, you would need to recoup any money you’ve spent from your IRA before the 60-day deadline. If you don’t return the full amount or don’t make the 60-day window, you’re subject to an early withdrawal penalty. Christy Bieber of The Motley Fool points out this is purely an option worth considering for short-term money needs.
Can you make withdrawals without penalty?
Bieber writes it is possible to make tax-free, penalty-free withdrawals from a Roth IRA, as long as it’s a qualified distribution. According to the Internal Revenue Service, a qualified distribution can only be made if the account has been open for five years and you meet at least one of four criteria. You must either be 59.5 years of age or older when making the withdrawal, legally disabled, or using the money to pay qualified acquisition costs on a first home. A qualified distribution can also be made to your estate or beneficiary after your death.
In other circumstances, you can make withdrawals and pay the regular income tax rate but avoid the 10 percent penalty. The IRS lists situations including having unreimbursed medical expenses exceeding 7.5 percent of your adjusted gross income, paying health insurance premiums during unemployment, and distributions not exceeding your qualified higher education expenses.
In all non-qualifying situations, money taken from an IRA is subject to income tax and a 10 percent penalty. If you think your situation may meet the standards for qualified distributions, talk to your financial planner.
Remember your goal
If you’re thinking about borrowing from your IRA, you should first consider the point of having one. The sole purpose of an IRA is to save money for your retirement, and pulling money out of that account means losing gains on your investment. Simply put, if you pull money out of your IRA now, you’re hurting your retirement potential down the line.
In almost all cases, you’ll have plenty of alternatives to consider instead of drawing from your IRA. Coombes notes a zero-interest introductory rate on a credit card, a peer-to-peer loan, or a personal loan could all cover your financial needs without you needing to tap into your retirement.
When it comes to your retirement savings, trust the expertise of your financial adviser. They’ll break down the risks and rewards of drawing early from an IRA or 401(k) and provide alternative solutions that could better meet your needs.