Dear Retirement Adviser,
Aloha! I was reading a Q-and-A about taking out a loan from an individual retirement account and an article about taking out a loan from a 401(k) on Bankrate. Can I take out a loan from either an individual retirement account or a 401(k)? My husband and I want to buy a house and we need money for the cash down payment. We both have more in our 401(k)s than our IRAs. We think we would like to take out about $25,000 from his 401(k), pay it off with another loan from my 401(k) within about 55 days and then pay back into my account as much as we can within 55 days after that. We're prepared to the pay 10% penalty and taxes on the amount that we can't pay back immediately. I was hoping for more specifics about how we can do this.
-Kelly, from Hawaii
The good news is that it's simpler than you're making it. The bad news is that you can't, technically, borrow from your IRAs. What you can do, however, is to take the money out of your IRA. As long as it's redeposited into a new IRA within 60 days, it isn't considered a distribution. There are no damaging tax implications or penalties. It is like a 60-day loan. But, that won't be your best approach.
If you're a first-time homebuyer, you can take up to $10,000 out of your IRA to use to buy, build or rebuild a first home without the distribution being subject to the 10% penalty tax. If the contributions to the IRA were made with pretax dollars, you still owe income taxes on the distribution.
If your 401(k) plan permits it, you can borrow against your plan balance. The loan limit in a 401(k) plan generally is $50,000 or 50% of your vested account balance, whichever is less. The loan typically must be repaid within five years, unless the loan is used to buy the plan participant's principal residence, and then the repayment can take longer. Talk to your employers about loan options available to you from the two 401(k) plans.
The downside to a plan loan is that it comes due upon separation from service, meaning employment. If you are laid off, the loan comes due. If you're unable to pay it back, then the loan balance is considered an early distribution subject to both income taxes and the 10% penalty tax if you're underage.
Between the first-time homebuyer's provision in your IRAs and your ability to take out 401(k) plan loans, there's no need to play financial hot potato with an IRA rollover contribution to get a 60-day loan.
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