Borrowing Against Roth IRA?

Question

I have heard on several separate occasions about the idea of “borrowing against an IRA” to build funds for investing, but am unable to find any more information about this when I search for it. Does anybody have any knowledge or experience with this? Thanks!

Brian Eastman · Answer

@Kyle Kline

You cannot borrow from an IRA plan. It is possible to borrow from an employer plan like a 401(k).

Some people claim to "borrow" from an IRA by executing a 60-day rollover. You can take a distribution from an IRA, and so long as you return the funds to a qualified retirement plan within 60 days, the distribution is cancelled. If you miss the 60-day window, the funds are irrevocably treated as a distribution. This is allowed once per 12 months per taxpayer. I have seen more people torch their retirement plan using this "strategy" than I care to think about.

As @Chris Seveney notes, an IRA can be setup with a specialty self-directed custodian so the IRA can be invested in non-traditional assets like real estate. This is not a means for you to invest in real estate personally, and you cannot personally benefit such as by keeping the income yourself. Rather, your IRA can invest in real estate instead of being limited to investing in the stock market. If you think you can generate better performance for your IRA in real estate, this is something to explore.

Brett Synicky · Answer

@Kyle Kline A couple of things I'll add. 1. You can always "borrow" or withdraw the principle since you already paid taxes on it. 2. If you qualify for a solo 401k (self employed with no w2 employees other than a spouse) you can take what's called a participant loan. Up to $50k or 50% (based on available cash) of the total plan assets whichever is less. Paid back by you at prime plus 1% over 5 years. Or 15 years if used for the purchase of a primary residence.

Chris Seveney · Answer

Why would you borrow funds and just not use the Roth IRA to invest?

Kyle Kline · Answer

Thank you all for your responses. Each time I heard about this concept it was in a vague context, so I assumed either I was misunderstanding or that it was not a realistic strategy. I just wanted to explore it and see if there was any validity to it, so I appreciate all of your feedback. Thanks!

Jeffrey Dixon · Answer

You cannot borrow from your own IRA or a prohibited party to you. An IRA can use financing from a lender or seller financing to buy real estate. While the IRS allows this, it is a taxable issue. The tax is called Unrelated Debt Financed Income tax (UDFI).

Randy Rodenhouse · Answer

Unlike a 401k, you cannot borrow against an IRA. However, you can invest with your IRA into real estate as long as you have the correct self directed IRA setup. Also, you cannot buy a property you already own into your IRA that is self dealing. There are rules to follow but not hard to do.

Matt Devincenzo · Answer

I'd go reread the posts that mention that. Are they talking about borrowing from someone else's IRA? It's a pretty comon source for private lending since those with self directed IRAs are typically looking for alternative investments to place funds in.

Borrowing Against Roth IRA?

Borrowing Against Roth IRA?

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