Can You Borrow From an IRA? Rules, Taxes, and Options

Can You Borrow from an IRA?

No. IRAs don’t permit loans the way some employer 401(k) plans do. Any money you take out of an IRA is generally treated as a distribution. Before age 59½, most early distributions are subject to a 10% additional tax on top of ordinary income taxes, unless an exception applies.

Rules can differ by account type. For example, early distributions from SEP IRAs typically face the 10% penalty. SIMPLE IRAs impose a higher 25% penalty if you withdraw within the first two years of participation; after that period, the standard 10% penalty applies.

When Early Withdrawal Is Exempt from Penalties

The IRS provides several exceptions that waive the 10% early distribution penalty. You may still owe income tax, but the extra 10% can be avoided if your situation fits one of the following:

1. Unreimbursed Medical Expenses

You can take an early distribution without the 10% penalty to cover qualified unreimbursed medical expenses that exceed the applicable AGI threshold (generally 7.5% of your adjusted gross income). The costs must be for the same tax year you take the distribution.

2. Health Insurance Premiums During Unemployment

If you’re unemployed and meet specific conditions, you can use IRA funds penalty-free to pay health insurance premiums for yourself, your spouse, and dependents during the unemployment period.

3. Higher Education Costs

Qualified education expenses for you, your spouse, children, or grandchildren can qualify for penalty-free treatment. Eligible costs typically include tuition, fees, books, and certain required supplies or equipment.

Common eligible expenses include:

• Tuition
• Mandatory fees
• Books and course materials
• Required equipment or supplies

4. Permanent Disability

If you’re disabled as defined by the IRS, early distributions can be taken without the 10% penalty. Your IRA custodian may require documentation to substantiate the disability.

5. Inherited IRAs

Beneficiaries of inherited IRAs can take distributions without the 10% early withdrawal penalty. Note that if a surviving spouse treats the IRA as their own (rather than remaining a beneficiary), normal early withdrawal rules and penalties apply.

6. First Home Purchase, Construction, or Rebuild

You may withdraw up to $10,000 (lifetime limit) penalty-free to buy, build, or rebuild a first home. For this purpose, “first-time” generally means you (and your spouse, if applicable) haven’t owned a principal residence in the last two years.

7. Substantially Equal Periodic Payments (SEPP)

SEPP allows a series of calculated withdrawals that avoid the 10% penalty if you follow strict IRS methods. Payments must continue for at least five years or until you reach age 59½, whichever is longer.

8. IRS Levy

Amounts the IRS directly levies from your IRA to satisfy back taxes aren’t subject to the 10% penalty. Withdrawing funds yourself to pay taxes does not qualify for this exception.

9. Qualified Reservist Distributions

Members of the military reserves or National Guard called to active duty for at least 179 days may take penalty-free distributions. In many cases, these amounts can be repaid within two years of release from active duty.

Using the 60-Day Rollover Rule

The 60-day indirect rollover can function like a very short-term, interest-free bridge. You may withdraw funds from one IRA and redeposit the same amount into the same or another IRA within 60 days to avoid tax and penalties. This is limited to one rollover across all your IRAs in any 12-month period—missteps can be costly.

Example: If funds land in the wrong account or you need temporary liquidity, you could take a distribution and put the same amount back into an IRA within 60 days. Miss the deadline, and the amount becomes a taxable distribution that may also trigger the 10% penalty if you’re under 59½.

Tax Implications

Unauthorized early withdrawals from an IRA usually incur a 10% additional tax on top of ordinary income tax. SIMPLE IRAs can carry a 25% penalty if distributions occur within the first two years of participation. State taxes may also apply, so consider consulting a qualified tax professional.

Traditional IRA Early Withdrawal Example

If you take a $10,000 early distribution that doesn’t qualify for an exception, the penalty is typically $1,000 (10%), and the $10,000 is added to your taxable income for the year.

Alternatives to Borrowing from an IRA

Before tapping retirement assets, assess other funding sources that won’t jeopardize long-term savings growth.

Emergency Savings

Building a dedicated cash reserve can keep you from raiding retirement accounts during unexpected events. Start small and automate contributions to make steady progress over time.

Family and Friends

In a pinch, a clearly documented loan from someone you trust may be cheaper than incurring taxes and penalties in an IRA. Put repayment terms in writing to protect relationships.