Ways & How

How to Borrow from IRA without Penalty

How to Borrow from IRA without Penalty

Though retirement funds have a specific obvious purpose, you may need to or want to withdraw funds from your account before retiring. You do not need to wait until you retire to do so, but you should be aware of your options and find out how to borrow from IRA without penalty. Keep the rules of IRA borrowing in mind. First, know that borrowing money from your IRA is extremely discouraged. IRA rules state that you cannot use your IRA funds for collateral, meaning you cannot borrow against your IRA. If you are thinking of borrowing directly from your IRA, keep in mind that certain taxes and penalties go with it. You have to pay the corresponding tax for the amount you take out, plus a 10 percent penalty. The good news is that the following circumstances allow you to forego the penalty:

  1. Paying medical bills when they amount to more than 10 percent of your adjusted gross income. Take note that you need to do so in the same year that you incurred these bills.

  2. Permanent disability. In order to prove disability, collect disability payments from Social Security or your health insurance company.

  3. Maintaining health insurance while unemployed: You can make penalty-free withdrawals from your IRA if you are currently unemployed and you need to pay health insurance premiums. Remember that the money you withdraw should go directly to paying the latter. Moreover, you need to be unemployed for 12 months before you are eligible.

  4. Paying the Internal Revenue Service or IRS when you have any unpaid taxes.

  5. Buying a new home: Buyers can take out as much as $10,000 in order to buy their dream home. However, you should not have owned a home in the last two years in order to be eligible.

  6. Higher learning: If you, a spouse, or dependents are going to school, keep in mind that you can use your IRA money to pay for it. The money can cover tuition, books, supplies, and room and board. To be eligible, you or the eligible household member needs to be at least a part-time student going to a university, college, or vocational school and accepting federal financial aid.

  7. Early retirement income: You have to accept equal periodic payments so that your retirement fund acts like your early retirement salary. However, you must do this for five years or until you turn 59.5 years old—whichever comes first.

  8. Death: Beneficiaries can make penalty-free withdrawals from the IRA in case the IRA account holder dies. However, spouses may be subject to penalty if they make withdrawals before they turn 59.5 years old.

Being aware of the various ways on how to borrow from IRA without penalty can help you during times of dire need. However, keep in mind that it is better to take money from an emergency fund rather since your IRA is intended for retirement. You donÂ’t want to find yourself penniless come retirement age.


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