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Loans from IRA Accounts: A Guide to Borrowing from Your Retirement Funds

If you have an Individual Retirement Account (IRA), you may think that your retirement savings are for your golden years. However, did you know that you can borrow from your IRA account money to use in the present? Yes, it's true.

IRAs aren't typically thought of as a source of financing. However, in some cases, you're allowed to borrow money from your IRA account without penalties. In this article, we'll dive into the details of IRA loans and how they work.

What Are IRA Loans?

An IRA loan is a type of loan that you can take from your IRA account. The IRS doesn't call these loans 'IRA loans' because it doesn't recognize them as loans but instead refers to them as '60-day rollovers.'

Here's how it works: You withdraw money from your IRA account and have 60 days to pay it back. The IRS permits you one rollover every 12 months, but that rule applies only to funds withdrawn from the same IRA account. If multiple IRAs own the account funds, you can take fund withdrawals from each and issue separate rollovers.

What Are the Advantages of Taking Out an IRA Loan?

IRAs are designed to allow people to save money for their retirement years. As such, the rules and regulations about withdrawing money early or borrowing from an IRA account are strict. But there are a few advantages of taking out an IRA loan that you can consider:

Quick Access to Cash

If you're in dire need of cash and can't wait, the easiest way to access your IRA money without penalties is to take out an IRA loan. The application process is simple, and you typically have access to funds within a few days.

No Credit Checks Required

Your credit score doesn't matter when it comes to taking out an IRA loan. You don't need to demonstrate a creditworthiness, have a good credit score, or provide collateral because you're borrowing money against your IRA account, which serves as your collateral.

Low Interest Rates

Interest rates on IRA loans are typically low. You'll only have to pay the interest during the 60-day borrowing period, and you must pay back the loan's principal within those 60 days to avoid penalties.

What Are the Disadvantages of Taking Out an IRA Loan?

While there are some advantages to taking out an IRA loan, there are also some disadvantages to consider:

Penalties for Late Repayments

You must repay the entire loan amount within the 60-day timeframe, or you'll be subject to taxes and penalties. If you're borrowing a large amount of money and you can't pay it back within 60 days, you may need to roll over the entire account balance, which could trigger additional taxes and penalties.

Reduced Retirement Funds

When you take out an IRA loan, you are borrowing money from your retirement savings. As such, you'll have less money saved when you retire. If you're relying on your IRA account as your primary source of retirement income, you'll now have to make up for the money that you borrowed.

Lost Investment Income

The money that you withdraw from your IRA loses the potential to grow inside your account during the 60-day rollover period. If you're borrowing a substantial amount of money, this could lead to significant losses in investment income.

Can You Qualify for an IRA Loan?

To qualify for an IRA loan, you'll need to meet specific requirements:

You Must Be Over the Age of 59 1/2

IRA loans are not available to individuals who aren't retirement age. The minimum age to apply for an IRA loan is 59 1/2 years old.

You Must Have Sufficient Funds in Your IRA Account

If you don't have enough funds in your IRA account to meet your loan request, you won't be able to take out an IRA loan.

You Must Pay Back the Entire Loan Amount within 60 Days

As previously mentioned, you must pay back the loan amount within 60 days, or you'll be subject to taxes and penalties. If you can't pay back the amount within the 60-day timeframe, you may need to roll over the entire account balance.


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