What Are the Rules for Taking Out an IRA Loan?


Quick Answer

Loans are not permitted from an Individual Retirement Account, states the Internal Revenue Service. If a loan is taken from an IRA, the account ceases to be an IRA and becomes subject to tax, unless the money is rolled over into an IRA account within 60 calendar days.

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Full Answer

The IRS permits loans from qualified retirement plans, such as 401(k) and 403(b) accounts, but not from IRAs. A plan administrator is permitted but not required to design a qualified plan to provide loans. The loan amount is limited to 50 percent of the balance not exceeding $50,000. People affected by Hurricanes Katrina, Rita and Wilma are allowed loans of up to 100 percent or $100,000. If a participant defaults on a loan, the outstanding balance becomes taxable.

Although the IRS does not permit loans from IRAs, it allows a rollover period of 60 days. Participants can utilize this time window as if taking a loan. The plan administrator withholds taxes when distributing funds to the participant directly. Hence, the participant needs to use other funds to roll over the full amount. If the participant does not complete the rollover within the period, the withdrawn amount becomes subject to tax and a 10 percent penalty, explains the IRS.

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