Getting Money Out Of An IRA

Loans from an IRA are not technically permitted. However, you can borrow from an IRA tax and penalty free as long as the loan is repaid within 60 days. The time period can be extended with some planning.

The money may be used for any purpose.

If you do not satisfy one of the requirements for premature penalty-free withdrawals discussed above, you might have to pay taxes and penalties on the distributions. While trustees are not required to report loans, if a loan goes into default it becomes a distribution and the trustee must report it to the IRS.

Time period: You can borrow any amount up to the full balance in the account from an IRA tax free and penalty free as long as you return the money, or roll it over into another IRA, within 60 days. You are entitled to do this once every calendar year. You do not have to pay interest on the loan.

Limitation: You can only do this once a year for each account.

Reporting: Unlike other premature distributions from a retirement plan, the custodian of an IRA does not withhold any money from your distribution for income taxes, since it is expected that you will return the money and therefore not pay any taxes on it that year.

Purpose: Money borrowed from an IRA can be used for any purpose.

If you do not repay the mone within 60 days: If within 60 days after the withdrawal, you don't pay back the IRA or roll the money over into another IRA, the amount you withdrew will be subject to income tax and possibly also to penalties. The IRS used to make exceptions for some delays in repayments if the cause for the delay was beyond your control, but no longer does.

How to extend the loan time period: While you can borrow only once from an IRA within any 12-month period, you can extend the period of the loan because you are allowed to withdraw from other IRAs during the same period. If you have more than one IRA, you could actually use a withdrawal from a second IRA to pay the loan on the first. Then borrow from a third to pay off a second, etc. The result of using this strategy is that you'll actually have a long-term loan tax and penalty-free!

Even if you have only one IRA, if you have the ability to temporarily come up with an amount equal to the amount you withdrew at the end of each period, you can keep extending the loan by following these steps:

Step 1. Withdraw money from your IRA.
Step 2. Open a new IRA within 60 days.
Step 3. Deposit the funds you owe into the new IRA. (Remember, rolling the funds over will allow the loan to be tax and penalty-free).
Step 4. Withdraw money from your new IRA.
Step 5. Open a third IRA within 60 days.
Step 6. Repeat steps 3-5 until you have seven IRAs in total.

To make it easier to coordinate the opening of so many new accounts, all your IRAs can be with the same financial institution.

On the downside, you will pay for the maintenance of each account. Also, using this technique can be inconvenient.

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