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Before addressing the question of how to borrow from a Roth individual retirement account (Roth IRA), here’s a quick refresher on how a Roth IRA works. Contributions to a Roth IRA are not tax deductible when you make them. However, your distributions will be tax free as long as you’re over age 59½ at the time and are making a qualified distribution. This untaxed status applies to both your original contributions and the gains on them.
What’s more, unlike traditional IRAs, account holders never have to take required minimum distributions (RMDs) from Roth IRAs in their lifetime. In fact, if you don’t need the money, you can leave the whole account to your heirs.
Key Takeaways
- Internal Revenue Service (IRS) rules do not allow you to borrow from a Roth individual retirement account (Roth IRA) in the same way that you can borrow from and repay a 401(k).
- Early withdrawals of earnings from a Roth IRA (before age 59½) carry a 10% penalty.
- As long as money taken from a Roth IRA is replaced or rolled over into another qualified retirement account within 60 days, there is no penalty.
- Distributions for purposes such as buying a first home or certain medical expenses can qualify for no-penalty withdrawals, but only if the Roth IRA has been open for five years or more.
Borrowing from a Roth IRA
Technically, you can’t take out a loan from a Roth IRA. But you are free to withdraw your contributions at any time without paying penalties. However, if you want to withdraw the earnings on your contributions, you may have to pay taxes on the gains as well as a 10% penalty.
There is also a way to work around Internal Revenue Service (IRS) requirements if you only need to borrow money for a short period of time. In either case, you’ll need to work with the financial institution that handles your Roth IRA to make sure you fill out the proper forms.
According to the IRS, you can make a tax-free withdrawal of some or all of the money in your Roth IRA as long as you put the money back into either the same Roth IRA or a traditional IRA within 60 days. This is called a Roth IRA rollover, and it’s often used to transfer 401(k) funds when you change jobs or want more investment choices than your 401(k) provides. When the money is given to you to be deposited into your bank account, it’s called an indirect rollover.
If you can’t repay the full amount within 60 days, you have the option to repay a partial amount. However, you’ll have to pay a 10% penalty on the portion of the money that you keep if that money is earnings, not original contributions. In addition, there is a one-year waiting period between rollovers. The waiting period begins when you receive your distribution—not when you pay the money back.
Remember that any money you take out of your Roth IRA and don’t replace will be that much less that you’ll have for retirement someday. You’re also losing everything that those funds could have earned by the time you retire.
If you need to use more than the contributions that you’ve made to your Roth IRA and won’t have the funds to repay the money within 60 days, you can make an early withdrawal. Most early withdrawals are subject to a 10% penalty. Or, you may be able to take a qualified distribution and avoid paying the penalty as well as taxes on the earnings—if it’s been more than five years since you set up and contributed to your Roth IRA and if one of the following circumstances applies:
- The distribution is being used to buy, build, or rebuild your first home.
- You’re at least 59½ years old at the time of the distribution.
- You’ve recently become disabled.
Keep in mind that withdrawing money from your Roth IRA isn’t the best way to get a loan, especially if you can’t repay it within the 60-day window. Not only might you be subject to penalties and taxes, but funds taken out of the account won’t be earning tax-free returns and helping to build your retirement savings.
Advisor Insight
Rebecca Dawson
Dawson Capital, Los Angeles
Loans are not allowed from IRAs or IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRA plans. Loans are allowed from qualified plans that satisfy the requirements of 401(a), annuity plans that satisfy the requirements of 403(a)s or 403(b)s, and governmental plans.
That said, the principal amount of a Roth IRA may be withdrawn without any tax consequence because you have already paid taxes on those funds…but the amount that your IRA has appreciated is not available for withdrawal without paying certain types of taxes and fees.
There are also exceptions, such as when you convert the funds from a traditional IRA into a Roth IRA. In that case, the converted amount may not be available for penalty-free withdrawal for five years.
Are Roth individual retirement account (Roth IRA) withdrawals taxable?
Withdrawals of Roth individual retirement account (Roth IRA) contributions are never taxed, no matter when or how much you withdraw. However, the earnings may be taxable if you make a withdrawal before age 59½ and if you’ve had the account for less than five years. You’ll also have to pay a 10% penalty unless you qualify for an exception, such as unreimbursed medical expenses or if you are buying your first home.
How else can you borrow money if you need it?
Here are a few suggestions for finding extra money when you need it:
- Sell some assets. Consider putting valuables on eBay or selling clothing there or on thredUp (go to the Help Center and click on “Clean Out: Getting Started”). If you have recent-model electronics (laptops, large-screen TVs, tablets, phones, etc.), you can try getting cash on sites like Decluttr, Gazelle, and uSell.
- Take on a side job. You could try pet sitting or babysitting for friends or start a neighborhood dog-walking service. Or you could sign up for jobs through a website like TaskRabbit or Thumbtack.
- Tap your home’s equity. If you own your home and have sufficient equity, you may be able to take out a home equity loan.
- Take out a personal loan. The interest on a personal loan is generally higher than on a mortgage or car loan because it is unsecured. You can calculate the difference in costs to find out if it makes more sense to get a personal loan or withdraw funds from your Roth IRA.
What happens if you can’t put back what you borrowed?
If you are unable to return all the funds to your Roth IRA within 60 days, you still can repay a partial amount. But there will be a 10% penalty on the amount of earnings that you keep. Also, you’ll have to wait one year before you can “borrow” money from your Roth IRA again. This action is called a rollover, and the waiting period starts when you get your distribution.
