Why Borrowing From an IRA Could Cost You Thousands More Than You Think

The Hard Truth: You Can’t Really “Borrow” From Your IRA

Here’s what catches most people off guard—IRAs don’t work like 401(k)s. You can’t actually take out a loan from your IRA the way you might from a workplace retirement plan. That $50,000 sitting in your IRA? You can’t borrow against it with the promise to pay it back. Any money you pull out is classified as a distribution, and that changes everything tax-wise.

Traditional IRAs treat distributions as taxable income. Roth IRAs have their own rulebook, but neither account is built for the “borrow and repay” structure people often imagine.

The Real Cost of Tapping Your IRA Before 59½

Let’s do the math on what early extraction actually looks like.

You withdraw $10,000 from your Traditional IRA at age 45. Here’s what happens:

• You owe income tax on that full $10,000. If you’re in the 22% federal tax bracket, that’s $2,200 right there.
• The IRS adds a 10% early withdrawal penalty on top: another $1,000.
• Total immediate hit: $3,200, or 32% of what you took out.
• This doesn’t even include state and local taxes, which could push your total loss even higher.

But that $10,000 is gone for more than just the taxes and penalties. Over the next 20 years, assuming even a modest 7% annual return, that money would have grown to roughly $38,600. Instead, you got $6,800 in hand and lost nearly $32,000 in future purchasing power.

That’s the real cost of borrowing from an IRA—it’s not just today’s taxes, it’s tomorrow’s retirement security.

When the IRS Actually Lets You Off the Penalty Hook

Not every early withdrawal triggers that 10% penalty, though taxes usually still apply. The IRS carves out specific exceptions:

Medical expenses that exceed 7.5% of your adjusted gross income can qualify for penalty-free withdrawal (though you’ll still owe income tax). First-time homebuyers can withdraw up to $10,000 lifetime for a down payment. Education costs for yourself, a spouse, or dependents may qualify. Disability or substantial medical hardship opens the door, as does higher education spending or certain unemployment insurance premiums.

There’s also a strategy called Substantially Equal Periodic Payments (SEPPs), which lets you set up a series of withdrawals that avoid the penalty as long as you stick to the formula—but miss a payment or change the plan, and the IRS can retroactively assess penalties plus interest going back years.

The catch? These exceptions don’t eliminate taxes. You’re just dodging the 10% penalty, not the income tax bill.

Traditional vs. Roth: Why the Withdrawal Rules Differ

Traditional IRA contributions might be tax-deductible when you make them. Your money grows tax-free inside the account. But the moment you withdraw anything, it’s treated as taxable income. Contributions and earnings both count. If you withdraw early, you hit the double whammy of income tax plus the 10% penalty.

Roth IRA flips the script on contributions. You fund it with after-tax dollars, so no deduction upfront. The payoff is that qualified withdrawals in retirement are completely tax-free—both the contributions and the earnings. The flexibility is real: you can pull out contributions any time without penalty or tax. Earnings are where the rules tighten. Take out earnings before age 59½, and you face taxes and penalties, unless one of the exceptions applies.

The 60-Day Rollover: A Risky Short-Term Solution

Some people try to use the 60-day IRA rollover as a workaround for short-term cash needs. The concept is simple: withdraw funds from your IRA, and you have 60 days to deposit them back into the same IRA or a different one without tax or penalty consequences.

Sounds like a free loan, right? It’s not. Miss that 60-day window by even one day, and the entire withdrawal becomes taxable. If you’re under 59½, you’ll owe income tax plus the 10% penalty. And there’s another limit: you’re only allowed one rollover per 12-month period across all your IRAs combined. Use this trick too often, and you’ll trip up the IRS’s rules.

Better Alternatives Worth Exploring First

Before you raid your IRA, consider what else is available:

A personal loan from a bank or credit union might come with a 6-12% interest rate, but at least you’re not destroying your retirement savings. A home equity line of credit (HELOC) offers lower rates if you own property. A 401(k) loan (if your plan allows it) lets you borrow against your workplace retirement balance—you pay yourself interest, not a bank, and the money goes back into your retirement account.

These alternatives cost you something, but they cost significantly less than the combination of taxes, penalties, and lost growth from an IRA extraction.

How to Build a Stronger Retirement Plan So You Never Need to Raid Your IRA

The best strategy is prevention. Work with a financial advisor to:

• Maximize regular contributions to your IRAs and 401(k)s. For 2024, you can contribute $7,000 to an IRA (or $8,000 if you’re 50+), and potentially much more to a workplace plan.
• Align your investments within the IRA to your risk tolerance and timeline. A 35-year-old has decades for market growth; a 60-year-old needs more stability.
• Diversify your retirement income sources. IRAs shouldn’t be your only safety net. Factor in Social Security, pensions, other investments, and any side income when building your long-term plan.
• Build an emergency fund outside retirement accounts. This is your first defense against the temptation to withdraw from IRAs early.

The Bottom Line on Borrowing From Your IRA

The fundamental truth: IRAs aren’t designed as short-term lending vehicles. Treating them that way costs you far more than the immediate tax bill—you lose the compound growth that makes retirement accounts powerful in the first place.

If you’re considering tapping your IRA because you need cash, pause and explore alternatives first. Consult with a financial advisor who understands your complete financial picture, including your retirement timeline, tax bracket, and other resources. The few hundred dollars you might save by getting expert advice could easily turn into thousands in long-term retirement security.

Your IRA’s job is to fund your future, not to solve today’s problems. Keep it that way.