How to "Borrow" from Your IRA for Free

Need a big chunk of cash fast? Borrow it from your IRA!

Wait, wait, before you start shouting that you can’t borrow money from your IRA—technically, that’s true—listen to the explanation.

There is a little-known provision in the IRA rules that allows what are called “indirect rollovers.” If you understand how to use an indirect rollover, you can get what amounts to a tax-free, interest-free loan for 60 days once a year from your IRA.

You probably already know that you can transfer funds from one IRA to another once every 12 months. But, did you know that the law gives you a 60-day grace period to make the transfer? An indirect rollover takes advantage of that grace period. You don’t actually have to move the money into another account; you can return it to the original IRA, as long as you do so within 60 days. That means you can take out a sum of cash, do with it as you please and return the same amount (no interest necessary) back to your account. You won’t have to pay any tax withholding, any taxes on the loan or any penalty as long as the money gets back in time.

The Loan "Loophole" Explained
When would such a tactic prove useful? Say you needed a lot of money within a few days. Maybe you have a big investment opportunity or a sudden, unexpected home repair. It can be difficult to get a loan financed and funded in such a limited time. With an indirect rollover, you can get the money in hand usually within 24 hours. Generally, 60 days should be enough time to secure more permanent financing (like a home equity loan) so that you can repay your IRA.

Before you go calling your IRA trustee, however, heed a word of caution. The 60-day grace period is exactly that—60 days. At 61 days the IRS will come knocking and they’re not going to accept any excuses for why that money isn’t back in your IRA account. Count the days out exactly because 60 days does not always mean two months. If you don’t know that you can get that money back in time, don’t take the rollover. It is never worth it to gamble with your IRA or the IRS.