Can You Borrow Money from a Roth IRA?

by Scott Sery on June 6, 2012

The Roth IRA is an excellent place to store up money for retirement.  It provides great tax benefits, and the early withdrawal penalties prevent most people from taking the money out too soon.  But there are times when a person needs to access this money.  They just have too many bills that have piled up, and they have nowhere else to turn.  While it is not recommended to borrow money from a Roth IRA, the individual can do it.  And if they follow the rules they can get a “free” loan for 60 days.  Of course, if they do not follow the rules, this loan can end up being quite costly.

The steps to borrowing money are pretty simple.  The problems set in if they are not followed exactly.  The first thing the IRA owner needs to do is simply withdraw the money.  They should not worry about having taxes withheld, since if done properly there will be no tax implications.  The money can be used for whatever they need, and as long as the exact amount is put back in within 60 days, there will be no penalties paid.  So if the money is requested on July 1st, and the check is issued July 2nd, the 60 days starts from the second.  There are no grace periods, so if the 60 days lands on a weekend or holiday, it is necessary to get the money back in before the time is up.  In order to prevent people from taking multiple free mini-loans the government has made a one-year rule.  From the time the money is requested from the IRA, there may be no other requests within 1 year.  If there are, it is counted as a distribution and the owner will owe taxes, and if they are under 59.5 years old, a 10% penalty.  The one year is measured from the time the loan is taken, not the time it is repaid.

It is very important not to go one day past the 60 days.  The IRS will not budge, and one day late will cause the loan to be treated as a distribution.  This means federal income taxes are due, state if applicable and that nasty 10% penalty for those under 59.5 years of age.  In order to make sure the sixty days is not anywhere close, many mutual fund companies will allow the investor to put the money back in, without paying new sales charges, as long as it is within 30 days.

These loans are not really free at all.  The money is out of the stock market, and if the market goes up, the investor will lose out on any gains made during that time.  Technically the loan is a rollover.  And it will need to be declared on taxes (as a rollover, not a distribution, so therefore no taxes will be required).  If it was done correctly, there will be no problems.  If done incorrectly, it would have been better to get a personal loan from the bank and not pay the 10% penalty.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development
  • Hmmm… so you can only take money out (without fees) if you pay it back within 60 days?! That sounds so odd. I was thinking of taking my contributions out of my roth to pay for school, because I thought you could take the contributions out penalty-free. Is that not the case?

  • Great advice – the Roth IRA seems to be a good savings vehicle, even for college. Now I just need to get one!

  • Economically Humble

    Interesting… I would think that taking out money is a last minute resort. I p

  • At least with a Roth IRA you can withdraw what you’ve put in with no penalty.

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