How Much Money Can Be Borrowed From a Roth IRA?

by Michael Keenan
IRAs, unlike some workplace plans, don't offer official loans.

Roth individual retirement accounts let you save after-tax dollars, which is a big benefit if you expect to pay a higher tax rate at retirement than in the year you're contributing. But once the money's in, borrowing from your Roth IRA isn't usually an option like it would be with a 401(k) or 403(b) plan.

Loans Prohibited

You're prohibited from taking a loan from your Roth IRA by the IRS rules. You also can't circumvent this rule by taking out a loan and using your Roth IRA as collateral, because that's prohibited, too. If you take a loan, your IRA stops being treated as an IRA, so you're essentially distributing the entire account. If you pledge just a portion of your Roth IRA as security, that portion is considered distributed when you sign on the dotted line for the loan.

Short-Term Use

If you only need the money from your Roth IRA for a short period of time, you might be able to use a rollover to access the money. When you do a rollover, the IRS gives you a grace period of 60 days from the time you take the money out until you redeposit the money back in either another Roth IRA or even the same Roth IRA. As long as you meet the deadline, the IRS doesn't care how you used the money. For example, you could take a distribution of $10,000, use it to buy a car, get your year-end bonus 50 days later and on the 59th day, put it back in your Roth IRA as a rollover.

Rollover Limits

You can't do a rollover more than once per Roth IRA during any 12-month period. For example, say you take the money out on March 15, 2013, and roll it over into a second Roth IRA within the 60-day limit. If you take another distribution from either IRA before March 15, 2014, you can't roll that money over -- it's a permanent distribution. But if you take the second distribution after March 15, 2014, or you have a separate Roth IRA that you take the distribution from, you're safe to roll it over.

Warning

Using a rollover as a loan isn't without risk. If you take a distribution and don't get the money back in the account before the deadline, you're stuck with a permanent distribution. If you're not eligible for a qualified withdrawal, you owe taxes and the early withdrawal penalty on the earnings portion of the distribution, if any. (You can always take out your contributions only -- not earnings -- tax- and penalty-free.) If you can take a qualified withdrawal, meaning your Roth IRA is at least five years old and you're either 59 1/2 or permanently disabled, you can't put the money back in, but you won't owe taxes or penalties on the withdrawal.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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