Borrowing from Your IRA

The rules governing IRAs let you take money out of your account, penalty- and tax-free, as long as you pay it back within 60 days. The idea behind that 60-day window is to give investors time to move cash from one IRA account to another. If you don’t put the money back within the 60-day limit, though, you’ll be on the hook for income taxes on the withdrawal, plus you’ll get socked with a 10% penalty if you’re under age 59½.

The rules don’t say that you can’t do something else with the money you take out of the IRA, like buy a new car, or put a down payment on a house, or pay down some nagging debts. Many taxpayers think of this kind of IRA withdrawal as a short-term, interest-free loan to themselves, but it’s a risky move, say many financial advisors. If you aren’t able to get the cash back into the IRA within the 60-day time frame, you’ll pay those penalties and taxes on what is likely to be a hefty withdrawal—and the IRS isn’t likely to show you any leniency.

Another tricky IRA rule allows you only one tax-free withdrawal a year, unless you use direct trustee-to-trustee transfer, and you are barred for another year from making any withdrawals either from the account you took the money out of or from the account you transferred it to. On the plus side, the rules say you can take up to $10,000 out of an IRA penalty-free if you’re a first-time home buyer using the money for a down payment, or if you’re using the cash to pay for higher education expenses. You still have to pay taxes on the withdrawal, however.