How to Borrow Against a Simple IRA to Pay Off Debt
SIMPLE Individual Retirement Accounts are tax-qualified retirement plans that businesses with no more than 100 employees can create for employees. Under federal tax rules, employers can include loan provisions in 401(k)s and in many other types of pension plans. However, SIMPLE IRAs are subject to the same rules as regular IRAs, which means that you cannot take out a SIMPLE IRA loan. Nevertheless, while SIMPLE IRA plans do not include provisions for loans, you can still borrow money from the plan and use the money to pay off your debts.
Other People Are Reading
Instructions
-
-
1
Request a payoff quote from your lender so that you can withdraw the precise amount of money that you need to settle your debt. You should ask for a payoff quote that includes a per diem. Interest accrues on a daily basis so the per diem enables you to see how much extra money you need to add to the payoff quote on a daily basis to cover the accruing interest.
-
2
Provide your SIMPLE IRA custodian with the loan payoff quote and instruct the custodian to liquidate a portion of your account proceeds so that you can access sufficient funds to pay off the debt. Although SIMPLE IRAs are funded with employer contributions, the accounts belong to you from the outset so you do not have to seek your employer's permission before you make a withdrawal. On other types of pension plans, participants can only access money with the plan sponsor's consent.
-
-
3
Instruct the plan custodian not to withhold any money to cover federal income tax. If you make no such request, then the plan custodian must withhold 10 percent of the withdrawal amount to cover taxes.
-
4
Payoff your debt with the SIMPLE IRA withdrawal proceeds. You must replace the borrowed SIMPLE IRA funds within 60 calendar days of the withdrawal date. If you redeposit the money within this time frame, then the withdrawal has no bearing on your tax liability. If you do not repay the money within 60 days, then you cannot return the money to the SIMPLE IRA and you must report the event as a taxable withdrawal.
-
1
Tips & Warnings
Borrowing money from a SIMPLE IRA only makes sense if you are able to repay the debt within 60 days. If you have access to a 401(k) or other type of plan, then you should borrow money from that plan rather than your SIMPLE IRA since you can repay pension loans over the course of five years.
If you do not redeposit funds into your SIMPLE IRA within 60 days, then you have to pay ordinary income tax on the entire amount of the withdrawal as well as a 10 percent tax penalty. Worse still, the tax penalty rises to 25 percent if you withdraw money from a SIMPLE IRA that you have had for less than two years. Compare these tax penalties with the interest rates that you are paying on your debts before you think about cashing in your retirement account to pay off your debt.
When you borrow money from a SIMPLE IRA, 401(k) or any type of retirement plan, your plan custodian has to liquidate some of your account holdings to fund your withdrawal. You may have to pay trading fees, commissions or early redemption penalties for selling or redeeming the assets in your account.
