Friday, December 19, 2008

Friday Encore: So What about (Borrowing From) an IRA?

Friday Encore features a past blog posting that I thought you might not want to miss. Okay, call it a repeat if you want. When necessary the post may be updated with new information or data to keep it relevant. The following was originally posted March 19th, 2008.

So What about (Borrowing From) an IRA?

I was watching some news show a few weeks ago. You know how just before a commercial break they tease you with some exciting news? Well they got me because they were going to talk about a forgotten retirement savings plan. I stopped what I was doing and sat myself down because I just had to know. Then they came back with the big announcement. For about 30 seconds they said that the IRA was practically unused—forgotten. Really? Were they kidding? How could anyone forget the IRA? They didn’t present any data to back up this statement so I just assumed it was false. That is until I read this article on Motley Fool just a few minutes ago.

Did you forget about the IRA? If so, I encourage you to read the Fool article. I wouldn’t want you to miss out on this nice little tax-advantage savings vehicle.

If you haven’t forgotten about the IRA and you read yesterday’s post about borrowing from a 401(k) you might be wondering if it’s possible to borrow from an IRA. Ok, maybe you weren’t but I’m going to answer this question anyway.

photo by dimitridf

So, about borrowing from an IRA...You can’t. You can get funds from it, but technically it’s not borrowing. Two ways you can get money from your IRA—and let’s be clear we’re talking about before you reach retirement—are through qualified withdrawals or rollovers.

The first is rather straight forward according to the IRS. Qualified withdrawals are for medical expenses, home buying or college. This means that if you take a withdrawal for these expenses you can skip the usual 10% early disbursement fee.

If you, your spouse or child have a medical emergency it can kill your finances. So it’s somewhat comforting to know that you can tap your IRA in such an event. IRA withdrawals are penalty free if used to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.

To use your IRA to buy a home you and your spouse must have had no ownership interest in a primary residence for the two-year period ending on the date of acquisition of the new home.

Qualifying college expenses can include tuition, books, room and board, fees, supplies and equipment for undergrad or graduate degrees.

And now the Rollover method. This one is a bit risky. Essentially you are closing one IRA, using the money, paying back the funds and opening another IRA all in 60 days. It’s not so much borrowing; it’s more like a loop hole. Confused? I let the fools over at Motley Fool explain it. They’ll do a much better job.

Meanwhile don’t forget to make your last minute IRA contributions to count on your 2008 taxes. You can make contributions up until April 15, 2009.

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