Accounting Consultation

Free consultation

Our accounting firm offers a free initial consultation to small business owners in the Springfield area. Please call us at 217-544-2120 or complete this form and we will contact you shortly.

Contact Us

Send Us a File

Send your private, encrypted files directly to our CPA firm.

Send a File

Tax Center

Visit our Tax Center to sign up for tax due date emails, track your refund and more.

Learn More

Rules for Borrowing From Your IRA

« Back to Individual Tax

Individual Retirement Accounts (IRAs) are designed to help you save for retirement, and they come with a set of rules and regulations to encourage long-term savings. While it's generally not recommended to dip into your IRA before retirement, there are certain circumstances where you can borrow from your IRA without incurring penalties or taxes. However, it's crucial to understand the rules and potential consequences of doing so. In this article, we'll explore the rules for borrowing from your IRA.

Types of IRAs

Before we delve into the rules for borrowing from your IRA, it's essential to understand the two main types of IRAs: Traditional IRAs and Roth IRAs. The rules for borrowing from these accounts differ significantly.

1. Traditional IRA:

Contributions: You may make tax-deductible contributions to a Traditional IRA, which can reduce your taxable income in the year you make the contribution.

Distributions: Distributions from a Traditional IRA are generally taxed as ordinary income. You must start taking required minimum distributions (RMDs) after reaching the age of 72.

2. Roth IRA:

Contributions: Roth IRAs accept after-tax contributions. This means you don't get a tax deduction when you contribute, but qualified distributions in retirement are tax-free.

Distributions: Contributions to a Roth IRA can be withdrawn at any time without taxes or penalties. Earnings, however, may be subject to penalties and taxes if withdrawn before age 59½.

Now, let's look at the specific rules for borrowing from both types of IRAs.

Borrowing from a Traditional IRA

Traditional IRAs have strict rules regarding borrowing money, and taking funds from your Traditional IRA may result in taxes and penalties. Here are the key points to consider:

1. Early Withdrawal Penalty: If you withdraw funds from your Traditional IRA before you reach age 59½, you will typically face a 10% early withdrawal penalty. Additionally, the distribution is subject to income tax.

2. Exceptions: There are specific exceptions to the early withdrawal penalty, such as using the funds for qualified education expenses, first-time home purchases, certain medical expenses, or to cover substantial unreimbursed medical insurance premiums if you're unemployed.

3. Required Minimum Distributions (RMDs): Starting at age 72, you are required to take minimum distributions from your Traditional IRA. Failing to do so can result in hefty penalties.

Borrowing from a Roth IRA

Roth IRAs have more flexibility when it comes to accessing your contributions, but the rules for earnings are stricter:

1. Contributions: You can withdraw your Roth IRA contributions at any time without incurring taxes or penalties. This is because you've already paid taxes on these funds.

2. Earnings: If you withdraw earnings from your Roth IRA before age 59½, the distribution may be subject to income tax and a 10% early withdrawal penalty, unless an exception applies.

3. Exceptions: Similar to Traditional IRAs, there are exceptions to the early withdrawal penalty for Roth IRAs, including qualified first-time home purchases and certain medical expenses.

It's essential to note that borrowing from your retirement accounts should be a last resort. When you take money out of your IRA, you're not only potentially subject to taxes and penalties, but you're also depleting your retirement savings. It's generally recommended to explore other financial options, such as emergency funds, low-interest loans, or budget adjustments, before considering an IRA withdrawal.

IRAs are intended for retirement savings, and there are rules in place to encourage responsible use. While there are exceptions to these rules, it's vital to consult with a financial advisor or tax professional before making any decisions about borrowing from your IRA. Your financial future is at stake, and making informed choices is key to a comfortable retirement.


Contact Our CPA Firm

2501 Chatham Road, Suite 120,
Springfield, IL 62704

Phone number: 217-544-2120
Email address: amurphy@central-illinois-cpa.com

Accounting Newsletter

We offer a free monthly newsletter featuring tax saving strategies, QuickBooks tips, ideas for growing your business and more.

 

Tax Tips

Five Ways to Prepare for Tax Filings

Organize records for tax return benefits Now that the page has turned on another calendar year, the tax return season is fast approaching.

• Read More