Key takeaways

• You cannot borrow directly from an IRA.  This IRS prohibition applies to all types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.
• The IRS does allow for early withdrawals from traditional and Roth IRAs for certain circumstances and uses, without incurring a 10% penalty.
• Savers can borrow from a 401(k) or 403(b) plan — if allowed by the plan sponsor — often referred to as a retirement plan loan.

Considering borrowing money from your retirement savings account? While there are ways to access the money in your IRA, a loan isn’t one of them. However, there are other retirement accounts you can borrow money from, as well as other ways to get the money you need from your IRA.

Understanding IRAs

An IRA — short for individual retirement account — is a type of tax-advantaged account you can use to save for the future. Unlike other accounts like 401(k) plans, IRAs aren’t offered by an employer. Instead, individuals can open an IRA on their own directly through a brokerage firm, as well as choose all of their own investments.

There are two primary types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA is a pre-tax account. You can deduct your contributions, and any earnings are tax-deferred in your IRA. However, you’ll pay income taxes on your withdrawals. A Roth IRA, on the other hand, doesn’t allow you to deduct your contributions. However, you won’t be taxed on any investment growth with qualified withdrawals.

There are also some types of IRAs that are specifically designed for self-employed individuals and small business owners. Those IRAs, including SEP IRAs and SIMPLE IRAs, have different rules regarding eligibility, contributions, and more.

Can you borrow from an IRA?

The short answer is that no, you can’t borrow from an IRA. This prohibition on IRA loans applies to all types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

If you attempt to borrow from your IRA — the amount you withdraw from the IRA will be taxable income and you may jeopardize the qualified tax status of your IRA which could cause the entire balance to be included in your income.

Taking early withdrawals from an IRA

Unlike employer-sponsored retirement plans like 401(k)s, IRAs don’t allow plan loans. Any time you take money from your IRA, it will be considered a withdrawal and will be taxed as such. The consequences of that will depend on the type of IRA you have.

Traditional IRA

First, you can technically withdraw the money in your traditional IRA at any time. Because the money was contributed pre-tax, you’ll pay income taxes on all withdrawals. Additionally, if you take any distributions before age 59 ½, you’ll pay a 10% penalty on the full withdrawal amount.

For example, let’s say you withdraw $10,000 from your traditional IRA to pay for an emergency. If you’re in the 22% tax bracket, you’ll pay $2,200 in income taxes. You’ll also pay $1,000 in additional penalties. Of the $10,000 you withdrew from your account, you’ll end up paying $3,200 to the IRS, meaning only $6,800 stays with you.

Roth IRA

The withdrawal rules for Roth IRAs work differently because of the after-tax nature of their contributions. First, you can withdraw your Roth IRA contributions at any time without paying taxes or penalties.

To withdraw any investment earnings tax-free, you’ll need to meet the following requirements:

• It’s been five years since you first contributed to the Roth IRA
• The distribution occurs:
  • After you turn 59 ½
  • Because you’re disabled
  • Because the account owner has passed away
  • To purchase a home ($10,000 limit)

If you withdraw Roth IRA earnings without meeting the requirements for a qualified distribution, you’ll pay the same 10% early withdrawal penalty that applies to early traditional IRA withdrawals if you are under age 59 1/2. Additionally, you’ll pay regular income taxes on the Roth Earnings, which you wouldn’t have to do on qualified Roth IRA withdrawals.

Exceptions to the 10% early withdrawal penalty

Early withdrawals from your traditional and Roth IRAs are subject to a 10% early withdrawal penalty. However, the IRS offers a few exceptions that allow you to access your money early without penalties. Those exceptions are:

• You withdraw up to $5,000 for qualified birth or adoption expenses
• The IRA owner has passed away and you’re the beneficiary
• You’re totally and permanently disabled
• You withdraw up to $22,000 for disaster recovery in a federally declared disaster area
• You’re the victim of domestic abuse and withdraw up to $10,000 or 50% of the account, whichever is less
• You use the money for higher education expenses
• You use the money for a personal or family emergency (limited to once per year)
• You take a series of substantially equal payments
• You withdraw up to $10,000 to buy your first home
• There’s an IRS levy on your plan
• You pay for unreimbursed medical expenses of more than 7.5% of your adjusted gross income (AGI)
• You pay for health insurance while you’re unemployed
• You’re a qualified military reservist

Borrowing from a 401(k) or 403(b) - An alternative to IRA withdrawals

You can’t borrow money from your IRA, but it may be possible borrow from your 401(k) or 403(b) plan, which are employer-sponsored retirement plans offered by many companies and organizations. The IRS allows 401(k) loans, also known as retirement plan loans, but it’s up to each individual plan sponsor to decide whether to allow them for their plan.

Key elements of a 401(k) loan:

• If your 401(k) plan allows loans, you can generally borrow the lesser of $50,000 or 50%¹ of your vested balance.
• 401(k) loans aren’t considered withdrawals and aren’t taxable, but they do require interest when repaid.
• 401(k) loans must generally be repaid within five years using substantially equal payments. 
• If you leave your job — whether you quit voluntarily or are let go — you may have to repay the outstanding loan balance immediately to avoid taxation.

Read more: How do 401(k) loans work & are they right for you?

Weighing your options

When you need fast access to cash, it can be difficult to know what the best decision is.

If you need money and your only option is to take money from your retirement accounts, you might be weighing two different options:

• Take a withdrawal from your IRA
• Take a loan from your 401(k)

Both of these options have financial consequences. An early withdrawal from your IRA could be subject to taxes and penalties. Meanwhile, though a 401(k) loan doesn’t have tax consequences, you will have to pay interest on the loan. Additionally, by taking the money out of your account, even if only temporarily, it no longer has the potential to grow.

If you must choose between an IRA withdrawal and a 401(k) loan, the loan may be the preferred alternative because you are supposed to repay the money to your account which would avoid taxation. However, you might decide to take an IRA withdrawal instead if you have Roth IRA contributions you can withdraw tax-free, or if you meet one of the IRA early withdrawal penalty exceptions, such as buying a home or paying for higher education.

Finally, make sure to consider your other alternatives. There are plenty of loan types that may be accessible and can be used for any purpose. These loans may be preferable to a 401(k) loan or IRA distribution if you’re able to qualify for one. Here are a few loan alternatives to consider:

• Personal loan: In general, a personal loan is a fixed-rate installment loan that you can use for any purpose. Though personal loan rates are typically higher than the annual percentage rate (APR) you’d pay on a 401(k), they are usually lower than credit card rates. Personal loans can come in amounts as high as $100,000, so you can potentially borrow more than you could from your 401(k).
• Home equity loan or HELOC: Home equity loans and HELOCs are secured by your home, just like your mortgage. As a result, they often offer lower interest rates than unsecured loans. Home equity loans are fixed-rate loans, while HELOCs — short for home equity lines of credit — are revolving credit lines, just like credit cards.²
• 0% APR credit card: Credit cards generally aren’t the best option if you can’t repay your balance right away. An exception is a 0% APR offer, which some card issuers offer when you sign up for the card. With 0% APR, you pay 0% interest on your credit card, making them ideal for large purchases and balance transfers.
• Peer-to-peer loan (P2P): A P2P loan allows you to borrow directly from another person rather than a bank. P2P lending is usually done through an online marketplace that connects borrowers and lenders. A P2P loan could be a good alternative to a traditional bank loan if you’ve struggled to qualify for one.

No matter what you decide, it’s important to weigh your short-term and long-term goals. Consider how you can get the money you need today without sacrificing your retirement goals.