Understanding Your Capabilities and Limits for Borrowing from an IRA

On the rare occasion that you need funds quickly but have no regular avenues to draw from, you may be able to dip into your IRA.  However, to avoid the federal income tax consequence or additional tax penalties you must replenish your IRA (or another IRA you own) within 60 days of your withdrawal with the same amount that you borrowed.

Consequently, if you don’t pay the borrowed funds back within the 60-day period, the IRS considers it a regular loan and treats it as a “prohibited transaction.” Therefore, the money you borrow from your IRA is considered income and is therefore taxable at standard rates.  Furthermore, if you have not reached the age of 59½ you will owe an additional tax penalty of 10% on the money borrowed from the IRA, unless another tax-law exception applies to your situation.

If you need more time than the 60-day limit to fully replace the borrowed money, the borrowed money is taxable; however, you can still make an IRA contribution up until April 15th of the following year.  The 2013 and 2014 maximum allowable IRA contributions are $5,500/year (or $6,500 if you are age 50 or older).

Example: Age 49. You borrow $10,000 in 2013 and don’t pay it back in within the 60-day deadline, you will pay federal income tax based on your tax bracket on the $10K as well as the 10% tax penalty of $1,000 (provided you didn’t qualify for any IRA exceptions).  Even though you borrowed the money, you can still contribute $5,500 in a new or existing IRA account for 2013 up until April 15, 2014 as long as you didn’t already make a contribution for 2013.

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