Putting money in retirement plans is a way to invest for the future while saving on taxes, but tax-advantaged accounts face restrictions on withdrawals that can make it difficult to access funds before retirement. If you need money from a retirement account, you can't simply withdraw funds and replace them later because withdrawals are usually taxed as ordinary income and contributions are subject to annual limits. Some retirement plans do, however, include loan provisions that let you borrow money from your account.
Retirement Plan Loans
Employer-provided retirement plans other than IRA-based plans are generally allowed to offer loans to participants. According to the Internal Revenue Service, profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans are all eligible to make loans. Borrowing is also allowed from Thrift Savings plans, which are retirement accounts available to federal employees. Loans from retirement accounts are limited to the lesser of 50 percent of the account balance and $50,000. Loans must generally be paid back with interest within 5 years, although an exception is made for loans taken out to purchase a primary residence. An employer is not required to offer loan provisions on a retirement plan, so you might not be able to borrow from your account even if you have a common plan like a 401(K).
Individual retirement accounts technically do not allow you to borrow against savings. According to the IRS, if you take a loan from an IRA, the account is no longer an IRA and you have to include the entire value of the account in your income. It is possible to borrow from an IRA on a short-term basis using an IRA rollover transaction. An IRA rollover lets you take money out of an IRA tax-free as long as you deposit the same amount back into an IRA within 60 days.
The main benefit of borrowing from a retirement plan is that you don't lose money in the form of interest. The interest you have to pay on loans from retirement plans goes back into your account, so you essentially pay interest to yourself instead of a lender. In the case of IRA rollovers, you don't pay interest at all.
Taking loans from a retirement plan or using an IRA rollover to access cash short-term can be risky. If you lose your job, your employer may require you to pay back the entire amount of a retirement plan loan within 60 days. In this case, any amount you don't pay back is treated as a taxable withdrawal. Similarly, if you don't put money back into an IRA within 60 days of making a withdrawal for a rollover, it is treated as a normal taxable distribution.
- Internal Revenue Service: Retirement Topics - Loans
- Internal Revenue Service: 401(k) Resource Guide - Plan Sponsors - General Distribution Rules
- TSP.gov: TSP Loans - Loan Basics
- Internal Revenue Service: Retirement Plans FAQs Regarding Loans
- SmartMoney: Borrowing From Your IRA
- Charles Schwab: Can You Borrow from Your IRA?
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.