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Can I Take a Loan From My IRA Account?
You can take a short term loan from your retirement fund called IRA. IRA stands for Individual Retirement Arrangements. Your IRA, Simple IRA (Savings Incentive Match Plans for Employees), SEP (Simplified Employee Pension), SARSEP (Salary Reduction Simplified Employee Pension) or Roth IRA retirement fund is a tax-deferred income until you start to withdraw it at the age of 59 1/2.
Your taxes at age 59 1/2 is assumed to be in the lower bracket because the earning capacity is not as much compared when you are younger. During the golden years, when you start using the retirement fund plus the interest it has earned, your income will not be heavily taxed because your earnings source has narrowed down at this age, as presumed.
You can defer withdrawal of your IRA to avoid paying taxes up to 70 1/2 years old. Once you reach this age, it is mandatory for you to start using your IRA. If not, you will be penalized by the Internal Revenue Service (IRS).
Therefore, deferring the use of your income until retirement becomes advantageous to you. Unless of course you belong to the 1% rich people.
Your IRA loan will only work if you need money on a short term basis. It means you have to repay it back within 60 days.
- Police blotter August 12 (Advice to Citizen)
Police were called by a citizen looking for the incremental value added to his 401(k) since 2007. Police were unable to find any.
Fortune Magazine (Aug 2011)
60-Day Rollover Rule
Borrowing money from your IRA follows the 60 day rule strictly. It is interest-free. This is considered as a rollover by the IRS. Technically, you are not allowed to borrow money from your IRA except for this 60 day window allowed by IRS to move around your IRA.
You have to make sure to put it back to your retirement fund before the 60 days will end. Otherwise, this will be considered as early withdrawal and you be penalized heavily, with certain exceptions to the rule.
Your Retirement Fund Besides IRA
Besides the IRA, other retirement funds are available out there that are usually employer sponsored plans such as 401 (k), or 403 (b), Keogh, etc. You can take a loan from these retirement funds. Taking a loan from your 401(k) entails interest cost. The interest rates vary from time to time. For 2012, the average interest rate is 4.25% per annually.
Your retirement fund usually allows loans to be given out to the plan's participants. Carefully weigh your options if it is better to acquire loan from other sources.
1) First time home buyer
You can borrow money from your retirement fund (employer sponsored plans like 401(k) ) to purchase your first house. A first time home buyer's loan can be repaid back within 15 years.
Uncle Sam is always ready to help first time home buyers. It allows retirement fund participants to borrow money for equity, escrow and other related payment purposes to acquire a house.
2) Personal loan
Same as in number (1) above, you can get a personal loan from your retirement fund, payable within 60 months. If you have an immediate health, house mortgage or other emergency needs, it is easier and faster take out a loan from your 401 (k).
The most common rule is to borrow 50% of your vested retirement account up to a maximum of $50,000, whichever is lesser. Vested amount means you own that retirement fund, without conditions. You have to repay the money you borrowed within the 60 months period. The repayment terms also depend on your retirement's policy on taking out loans.
How To Apply A Loan From Your Retirement Fund:
Your loan application can be done on-line with your plan administrator or through your Human Resource Department:
1) Fill out the application form
2) Indicate your desired loan amount
3) Sign your application
After processing your application and you got approved:
4) You will receive a notice of approval of the loan. The dollar amount can be the same or lesser from what you have applied for.
5) Information will be provided on the annual interest rate and how many months you need to pay back the loan.
6) You will receive your check from the mail or it will be deposited directly to your account.
The lend you take out on your retirement is using your accumulated fund by not incurring any early withdrawal penalty fee. At this point, you are not withdrawing your retirement fund at all but borrowing it temporarily, with the intention of paying it back with interest.
The interest you pay on your loan becomes an additional earnings to your retirement fund, pro-rated accordingly to your retirement investment.
Due to tax repercussions and possible investment losses, it is best to consult a Certified Public Accountant (CPA), licensed Tax Adviser or Certified Financial Adviser before taking out a loan from your retirement fund.
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