Penalty-free Loans

February 11, 2019

Need cash? You may have penalty-free options

Suppose you need cash quickly. Then you remember that you have an IRA. While you can’t take out a loan from your IRA, you may have other options — including access to funds short-term without any tax consequences.

  1. 60-day IRA rollover: IRA withdrawals are generally taxed at ordinary income rates, plus a 10 percent penalty applies to distributions before age 59 1/2. However, you can avoid the tax and any penalty by redepositing (“rolling over”) the funds into an IRA before the 60-day deadline. Only one such IRA-to-IRA rollover is allowed each year.Of course, using money from an IRA like a short-term loan is often a last resort. Consider your other options first.
  2. 401(k) loans: Other retirement plans often do allow loans. If your plan permits it, you may borrow 50 percent from your account balance, up to a maximum of $50,000. The loan must be repaid within five years. Although you’re paying interest at a relatively low rate to yourself, the loan effectively reduces your retirement savings.
  3. Home equity loans: Banks generally offer lower rates for home equity loans than credit cards. However, the loan must be secured by your home. Also, recent tax legislation eliminates deductions for most home equity loans.
  4. Personal loans: With a personal loan, you don’t have to put up your home as collateral, but the interest rate is likely higher than the rate for a home equity loan. Generally, the loan term is one to five years.
  5. Credit cards: This is a common way to borrow money, but it’s costly. Typically, the interest rates hit double digits. If you’re buying an expensive item you may benefit from an introductory no-interest card.

You’ll need to consider the best solution for your situation. Call if you have questions about tax consequences surrounding IRA withdrawals and contributions.

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