Can I Take a Loan From My Roth IRA?

The distributions that the IRS allows tax-free are called qualified distributions.

The funds in a Roth IRA belong to the owner, who can take money from the account at any time, but those funds may be subject to taxation and penalties. A distribution is similar to a withdrawal. Contributions made into the account are not taxable upon distribution, but the earnings may be if account holders do not adhere to restrictions set by the Internal Revenue Service.

Definition of Loan

The definition of a loan requires that money or property be given to an individual or business entity, who must eventually make repayment. Loans are usually subject to certain guidelines that the borrower must follow. Withdrawing money from a Roth IRA does not require, or permit, repayment. There are no restrictions on the use of the funds, however, after payment of any taxes and penalties due.

Roth IRA

A Roth IRA is an individual retirement account that can be either an account or an annuity. Account-holders contribute after-tax dollars to Roth IRAs and subject to certain limitations. As of 2010, an individual could contribute $5,000 of earned income per year. Individuals over age 50, could contribute an extra $1,000.

Non-Qualified Distributions

Lost gains on on a Roth IRA add to the cost of of taxes and penalties on money withdrawn.

Individuals who need money from their Roth IRAs typically take it in the form of a distribution, which may be qualified or not. Any distribution taken prior to the account being open for five years is non-qualified. Individuals pay an extra10 percent penalty on any such taxable withdrawals. Owners under 59 1/2 can take qualified distributions only for IRS-approved exceptions.

Qualified Distributions

Roth IRA holders receive qualified distributions tax-free, including those for exceptions set forth by the IRS. These exceptions include a first-time homebuyer, higher education expenses, disability, some medical expenses, a qualified reservist distribution, an IRS levy of a qualified plan or if the recipient is a designated beneficiary and the owner is deceased.

References

• Internal Revenue Service; Publication 590, Individual Retirement Accounts