Can I Borrow Money From My Retirement Fund?
Whether or not you can borrow money from your retirement fund depends on what type of retirement plan you have and on the specifics of your plan. But even if you can't borrow, you may be eligible for a penalty-free withdrawal. Either way, have a compelling reason to pull money out of your retirement account and understand well the provisions that detail how you must pay it back.
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Accounts You Can Borrow From
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The Internal Revenue Service sets the rules regarding which plans you're allowed to borrow money from. If your retirement plan is a 401k, 457, 403b, profit sharing, or money purchase plan, you may be able to borrow funds. The IRS allows borrowing as long as your employer elected to allow loans when the plan was set up. Check with your plan's administrator to see if this is the case. If so, you can borrow up to half of your account balance, not to exceed $50,000. You'll have five years in which to pay the money back and payments must be made in regular, equal payments over that time. Also, if you end up leaving your job, or get laid off, full repayment will be required within 60 days.
Early Withdrawals
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If you have any individual retirement account type plan, borrowing is strictly prohibited. And if you withdraw money before you're 59 1/2, you'll be penalized 10 percent and have to pay taxes on the amount withdrawn. Fortunately, the IRS outlines situations in which you can withdraw funds penalty-free (though you'll still have to pay applicable taxes). If you have a Roth IRA, you can withdraw your contributions at any time (because you've already paid taxes on them). However, earnings and contributions you haven't paid taxes on, as in a traditional IRA, aren't as easily accessed. You can withdraw money without penalty to pay for medical insurance premiums, medical expenses over 7.5 percent of your adjusted gross incojme qualified higher education expenses, up to $10,000 for a first home, or if you're disabled. Additionally, if you turn your IRA into an annuity, you won't be penalized. This means you receive equal payments annually based on your life expectancy. Also, you may be eligible for an early 401k withdrawal if you've fallen on hard times you couldn't foresee.
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Borrowing From Your IRA
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Technically borrowing from an IRA is prohibited. But there's a way you can have IRA funds in your possession, without penalty, and without having to pay interest or taxes, as long as you redeposit the entire amount back in an IRA within 60 days. It's called a "rollover," and it's not a loan. Nor is it intended to be used like one. For most people, this is a very bad idea. If you don't meet the strict 60 calendar-day requirement, not only are you taxed and penalized on the whole amount, but you can't redeposit it in another IRA. This is because the IRS sets annual contribution limits at $5,000, or $6,000 if you're 50 or older. Plus, the IRS only allows one rollover per year. If you try it twice, there's no 60-day rule. You'll be automatically taxed and penalized on the whole amount.
Be Careful!
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You don't want to decimate the account (or accounts) you've spent years growing by exposing them to unnecessary penalties and early taxes. Retirement funds are for when you can't or no longer want to work anymore. But if you're desperate and absolutely need cash now, talk to your plan administrator and/or financial adviser about how to do it right and other alternatives that might be available.
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