Dear Dr. Don,
I would like to borrow some money from my traditional IRA account. Are there additional taxes besides the 10 percent federal and the 1 percent state taxes?
-- Pastora Penalty
Dear Pastora,
Generally speaking, you can't borrow money from an IRA account. You can, in effect, get a 60-day loan by closing an account and then putting the money back to work in another IRA account within the 60-day window. The process is explained in IRS Publication 590, "Individual Retirement Arrangements."
However, I'm going to assume you're not looking for that type of short-term loan. If I'm wrong, read the Bankrate feature "Borrowing from an IRA."
If you can't get a standard bank loan, consider whether you want to take a distribution from your traditional IRA account. Early distributions are subject to a 10 percent penalty tax plus state and federal income taxes. The amount of the income tax due depends on your overall income in that tax year.
Taxes and penalties are different for early distributions from a Roth IRA because a Roth IRA is funded with after-tax contributions.
Taking an early distribution out of a traditional IRA account should be a last resort. Not only are you subjecting yourself to the taxes and penalties, but you'll also suffer a big setback in retirement planning. The Bankrate feature, "When it's OK to tap your IRA," provides a nice overview of the topic.
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