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Need a short term loan, but don’t know where to go? If your bank or 401k is not an option, don’t forget about your IRA. If you need money and you have the intention to put the money back, a little know fact is that you can just borrow from your IRA. It sounds simple, yes; but there are rules that you must abide by or taxes and penalties will follow. The basic rule is that you MUST have the money back into the account in 60 days. The 60 days is based on the day you actually receive the check and the IRS allows no extensions for this.
I know what you’re thinking, “You can’t borrow against your IRA”. Yes, that’s technically true. It’s a little known provision called an indirect rollover. Basically, you are borrowing money from yourself tax and interest free.
Why Would You Borrow From Your IRA?
If you’re in need of a quick infusion of cash but want to avoid those high interest payday loans, this could be a very effective strategy. The most common reason that people would do this is for a business or investment opportunity that would take too much time to get the funding for from a bank. Depending on your IRA custodian, you could have the cash in hand is as little as a week.
How Does the 60 Day Grace Period Work?
The 60 day grace period is considered to be a nontaxable rollover, so you are allowed to do this once every 12 month period. Please note that the 12 month period begins the day you received the check, not the day you redeposit into the IRA.
Borrowing Against Your IRA Not For All
If you are considering this strategy, be extremely conscious of the 60 day window. 60 days does not mean two months and don’t think that they exclude holidays and weekends. The IRS is very strict on this and you don’t want to pay tax and penalty when you don’t have to.
If you’re not confident that you can get the money back into your IRA in the 60 time winder, DO NOT TAKE THE MONEY! . The potential tax and penalties do not make it worth it.
Other Words of Caution
To get money out of the IRA, you’ll have to liquidate your holdings to raise the cash. That means you’ll have to sell your mutual funds, stocks, or ETF’s. A lot can happen in 60 days in the market, so you’ll be missing out on what gains (or losses) occur in that time frame.
Typically, you would want to explore other borrowing options. But if you have opportunity that you need to act on quick, taking money from your IRA in this fashion might be your best option.