Sources of loans that you might not think of

In today’s economy it is not unusual for someone to need to borrow money to tide them over due to an unexpected repair or other emergency.  If you have a retirement account – an IRA or 401(k) – you may be able to tap into those funds for a loan.

 

The IRS allows you to take money from your IRA for a short period of time with no tax or penalties.  As long as you replace the money within 60 days of the withdraw it will not create any tax issues for you.  Beware that the IRS is serious about the 60 day rule.  The money must actually be back in the account within 60 days.  Dropping a check in the mail will not work unless the financial institution posts the money to the account within the allotted 60 days.  You also have the option of opening a different IRA to avoid any tax consequences.  The new IRA must be of the same type.  So if you took money from a traditional IRA you must put it back in a traditional IRA – not in a ROTH IRA.  If you do take advantage of this short term “borrowing”, it is best to plan to put the money back into an IRA within 50 days of the original withdraw, to reduce the risk of a tax issue occurring.  If you send the money to the financial institution on time and for some reason they do not get it into your account after the 60 days has passed, the IRS does not care – they will assess tax and penalty.

 

If you have a 401(k) account with your employer, you may be able to borrow against it.  Not all 401(k) accounts allow this so you will need to check with your human resource person.  Unlike “borrowing” from an IRA, there is no 60 day requirement to put the money back into the account.  Most 401(k) plans will charge interest on the loan, although the interest really goes back into your own account.  There are some downsides to this loan.  The loan is a reduction of your retirement account and if you never repay it you will have less money to live on when you retire.  What is more of a downside is what happens to the loan if you leave the company.  Upon termination, voluntary or involuntary, the loan becomes due back to the 401(k) plan.  Failure to repay the loan at that time results in the amount of the loan becoming fully taxable and possibly subject to penalties in the year employment ends.

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