Monthly Archives: May 2014

Consider The Option Of Borrowing Against Your 401k For A Loan Alternative

Can You Borrow From Your Individual Retirement Account?

When you are cash trapped and have limited sources of getting financial help, there are choices you have which can help you sort out the problems you are facing. One choice you can explore is your individual retirement account or the traditional IRA. Consumers are able to get 60-day loan from the traditional IRAs, which is interest free. However, it is important you know the ins and outs of borrowing from this financial resource.

One thing you have to ensure is that you pay the money within that time frame because there are penalties that can harm your IRA kit. A 60-day period is offered for those who want to utilize this financial resource. The count of the days involves calendar days not the business days. Therefore, you have to keep a reminder so that you are not caught up by time.

If you do not pay back that loan in time, then you will be subjected to penalties. Unless you are entitled to a waiver or extension of the rollover requirements, your transaction could be considered as distribution from the account. This means that you will have to pay income tax on distribution.

In addition, if the distribution is considered to be early, meaning before the age of 59 and half, then you could owe additional 10 percent penalty. These are some of the aspects, which you have to weigh when taking a loan from your IRA. Another thing is that such a loan is a revolving credit, which means that you cannot return the borrowed amount to the IRA and take it for another 60 days.

One more thing is that there are rules that govern how you withdraw or take a loan from your IRA. You may not borrow money for just any other reason. There are circumstances in which you could be allowed take a loan of this type. One, you may use it for needs such as tuitions which are considered hardships. Second, you may also use IRA loans to pay for a home if you are a first time homeowner.

Because the penalties can be so high and constraining, you should ensure that you borrow what you can return within 60 days. If you and your wife both have separate IRAs, then you could utilize those resources to optimize the period of borrowing. For instance, you can borrow from your IRA, and pay back the amount just before the expiry date by borrowing from the wife’s IRA kit. This will mean that your wife takes another 60-day loan from her kit as a way of extending the period of the loan for the family.

The point to note here is that the second loan goes immediately to pay for the first loan before the term ends. This will ensure that you have a longer period to repay the loan and you are not penalized for failing to pay back in time. If you are able to use this credit facility properly, it could help solve some of the financial difficulties you are encountering.