Can I Borrow Money From an IRA and Put It Back Next Month?

by Maggie McCormick

It's hard to see your retirement funds sitting there when you find yourself short on money one month. Through an "indirect rollover," you can essentially take an interest-free loan from your IRA without taxes or penalties as long as you follow the rules. However, if you don't pay the money back on time, you'll have to face the consequences.

The Process

The process for "borrowing" money from your IRA is fairly simple. You let the company that holds your IRA know that you want to make a withdrawal. Withdrawal procedures vary by company, and may involve filling out forms, requesting the money through the phone or making the request online. When you are ready to pay the money back, you can deposit it into the same account you withdrew it from or you can deposit it into another IRA account, provided that it's the same type, traditional or Roth. You'll have to report it on your taxes, but you can list "0" as the taxable amount.

60-Day Limit

The time limit on these types of withdrawals is 60 days. If you're paying it back next month, you shouldn't have any problem getting your deposit in on time. However, if you're taking a bit longer, you must note that the 60 days includes weekends and holidays. To avoid penalties, get your deposit in ahead of time, especially if you are mailing a check or if a money transfer may take a few days. You don't want to risk penalties.

One-Year Rule

You can only make this type of withdrawal and deposit once per year for each IRA that you have. If you withdraw from one IRA and make the deposit into another, both of those IRAs are ineligible for tax-exempt withdrawals until a year has passed. You can still withdraw money from the IRA, but you will have to pay taxes and potentially a 10-percent early withdrawal penalty fee even if you pay the money back.

Potential Consequences

If you are unable to repay the money within the 60-day grace period, that money may be taxable, depending on the type of IRA and the amount withdrawn. In a traditional IRA, you'll have to pay taxes on the full amount in addition to a 10-percent penalty if you are withdrawing before the set retirement age. In a Roth IRA, you'll only have to pay taxes on the money if it includes gains in addition to principal; you'll also have to pay the 10-percent penalty for early withdrawal.

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