The Strategy to Borrow From an IRA
Putting money into an individual retirement account can be a worthy strategy to help you to a comfortable retirement once you reach the age of 59 1/2. If you decide that you need to get access to some of that money temporarily, you may be able to take a short-term loan against the funds.
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IRA Loans
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When you have an individual retirement account, the Internal Revenue Service does not allow you to borrow money from the IRA directly. If you borrow money from the individual retirement account, the account will cease to count as an IRA and all of the money in the account will lose its tax-advantaged status. Other qualified retirement plans such as the 401k and 403b plan allow for formal loans to be taken against the funds in the account.
How to Borrow Money
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Although the IRS does not provide an option to borrow money directly from the IRA, it can still be done legally. When you roll over the funds from your IRA to another retirement account, the IRS gives you a 60-day grace period to get the money to the other account. This means that during the 60-day window, you may use the money in any way you see fit. Then you get the money and deposit it into your new IRA within that 60-day window.
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Risks
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Although rolling your funds over into a new IRA can provide you with a short-term loan, it also comes with some risks. If you do not manage to get the money into the new IRA within 60 days, the money that you took out will count as a taxable distribution. This means that you will pay taxes on the money at your normal marginal tax rate. You will also have to pay a 10 percent early distribution penalty if you are not yet 59 1/2.
Rules
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To make this work, you do not even necessarily have to put the funds into another IRA. While you do have the option of opening a new IRA and depositing the funds into it, you could just as easily deposit the money back into your existing IRA. If you decide to roll over your funds, you can use this approach only once in a 12-month period. Using this option does not require you to pay interest on the money you borrow.
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