Short term loan to yourself from your IRA?

When times get tight, people get desperate to make ends meet.  Rent is due, phone bill is due, credit card minimums are due.  And they are due NOW.  But payday isn't until next week.  What to do?

The first thing most people do is max out the credit cards, borrowing from one to pay another.  Pretty soon they find themselves maxed in all of them.  Next they run to the nearest payday loan store.  Fortunately, I have never been to one, but my understanding is that the fees and interest charged for extremely short term loans is exorbitant.  Nonetheless, if the highest need is some money today, not tomorrow, it gets the job done.

Often, an IRA sits untouched.  As it probably should.  Most people under age 59 1/2 are afraid of touching that money because they have been told that to do so means taxes and IRS penalties.  Not to mention depleting their retirement funds, leaving them destitute in old age.

The tax laws allow 60 days for IRA rollovers.  This means that if you are closing your IRA at one custodian, you can have the check made payable to you, and have 60 days to deposit the funds into another IRA at another custodian.  The rule is intended to allow investors some time to research their best options and take their time making the subsequent deposit.

What this means to investors is that a short term cash crunch doesn't have to mean giving in to the modern day legal loan sharks known as payday lenders.  However this is not without risk.  The downside to using IRA money as a loan to yourself:

You better get the money back within the 60 days allowed.  If not, you will be subject to Federal and probably state taxes on the full amount.  You will also get hit with IRS penalties of 10% of the full amount.  If there's any risk that this short term cash crunch will turn into something longer, seriously research all other options first.

You are missing out on potential growth of the funds while they are in your possession rather than in your IRA.  However, with the exception of rare periods or volatile investments, the growth of your IRA is unlikely to surpass the interest and fees charged by payday or other short term lenders.

Watch out for fees, penalties or other expenses that your IRA custodian may charge for withdrawal or account closeout.  This will particularly be the case if your IRA is invested in load mutual funds or annuities.

Bottom line:  This is an option of second to the last resort.  But it's better than payday loans.

Comments

[financial freedumb]

I had written something awhile ago on this too...the whole thing sounds shady to me, but I guess it's doable...

[jesica wilson]

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[http://www.getaloanplus.com]

You should never cash your IRA early unless you absolutely have to. The government will charge you extra taxes and make it harder to get your money before retirement, and that should be a good thing. I would recommend getting a personal loan if you absolutely need it: http://www.getaloanplus.com

[Payday Loan]

I have done this many times and runnig max to my Credit card is foremost of them. You just get mingled in everything once you start nearing debt