We get it. Sometimes money gets tight, and there is nowhere else to look. But retirement accounts? You can do better.
Confusion abounds when it comes to accessing funds out of retirement accounts. 401(k)’s, Profit Sharing Plans, 403(b)’s, 457 Plans, and Money Purchase Plans are all allowed by the IRS to offer employees some sort of option for borrowing money from those accounts. The particular plan that you participate in is not required to offer loans, but the IRS does not allow, nor has it ever, allowed loans against Individual Retirement Accounts.
According to the IRS, IRAs and IRA-based plans (SEP, SIMPLE IRA and SARSEP plans) cannot offer participant loans. A loan from an IRA or IRA-based plan would result in a prohibited transaction.
Since I Can’t Borrow From My IRA, What Other Options Do I Have?
SEPP – One option that many IRA account owners overlook is the SEPP, or a 72(t) distribution. The SEPP is a commitment (more or less) to the IRS to withdraw a series of equal period payments out of the IRA. If structured correctly, the IRA account owner can extract some funds from the IRA without penalty – of course the withdrawals will still be taxable to the IRS, and the State that you file in as well. Calculations (and the withdrawals) are very complicated, but the SEPP may be an option.
401(k) Loan – As mentioned above, whether or not your employer offers a 401k loan, the IRS is good with loans from employer retirement plans. There are limitations (the maximum amount a 401(k) can permit as a loan is the lesser of
- $10,000 or 50% of your vested account balance, or
There are additional risks with a 401(k) loan. Consider the potential hazards. For example, if you default on the payback of the loan, you may be on the hook for taxes and penalties because if so, a distribution may be construed by the IRS. Or, if you got fired from
If, after you felt confident with the risks of a 401(k) loan, it is conceivable that you transfer IRA funds into your 401(k), in order to borrow from the 401(k) account. Definitely seek wise counsel with this plan, as it’s loaded with risk.
Federal Credit Union – This would by our first choice, if you’re eligible. Potential eligibility for credit union loans will depend on factors like your job, your geographical location, or a family member that may give you access to credit union loans. Sometimes, credit union loans charge interest rates that are slightly lower than traditional banks. Accessing cash from a credit union loan won’t jeopardize your tax situation like the above alternatives of borrowing from retirement accounts.