In your retirement days, your IRA is one of the most critical assets you have. At a time when you might need money, in case of an emergency, or otherwise, one of the first thought one gets is to take out a loan against your IRA funds. The most important thing you need to know about taking an IRA loan, is that you cannot. It is a common misconception among people that they can take up an IRA loan, especially since it is allowed to take loans against other retirement accounts.
Now that you know you can’t get an IRA loan, what else can you do to get the money you need? Here are a few options for you to consider –
- A 60 day rollover:
A long term loan on the IRA is not permitted, instead, you can choose to utilize your IRA assets for a relatively much shorter period of time, like 60 days. To do this, you use an option called 60 day rollover. In order to be able to do this, you need to meticulously follow the rules laid down by the IRS. The rules have been tightened a lot lately, so understand what you are getting into completely before signing it out.
- A 401(k) loan:
Withdrawals from your 401(k) fund are discouraged before you turn 59.5 years, you need to pay a 10% penalty if you do so. The best thing about a 401(k) loan is that you are borrowing your own money, money which was deducted from your own paycheck. It is not the bank’s money, it is your own, so the interest you pay, would also eventually come to you. The tenure for a 401(k) loan is five years, with no early repayment charges. This borrowing has no impact on your credit and mostly the only cost involved is a small origination/administration fee. It is important to note that 401(k) funds should not be used for leisure spending such as holidays or home redecoration, or that new sports car. A useful tip would be to keep the 401(k) for unexpected expenditures. If you leave your job, voluntarily or involuntarily during the time you have an outstanding loan, you have a 60 day time limit to pay the loan back.
- Roth IRAs:
A Roth IRA is still an IRA. Taking funds from the Roth IRAs is not an option you can consider. For a rainy day, you can withdraw up to 100% of your original contributions to Roth IRA.
No matter what you do, when there is money involved, there is risk involved. IRA withdrawals require you to pay back the loan within 60 days in case you voluntarily or involuntarily quit your job. If you don’t pay back the funds of the rollover within 60 days, then IRS treats it as a distribution, inviting income tax on it, plus a 10% penalty if you are less than 59.5 years of age, save a few exceptions. So, make your decisions wisely. Make it a practice to save money outside your retirement funds and plan for the rainy days. For any unexpected occurrences, you always have options to help you.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.