Can You Actually Borrow From an IRA? Here's What Most People Get Wrong

The Myth vs. Reality

Spoiler: You can’t actually borrow from an IRA like you borrow from a bank. Sounds wild, right? But here’s the thing—tons of people think they can tap into their retirement accounts whenever they need cash. Plot twist: any money you pull out is technically a “distribution,” not a loan.

Why does this matter? Because distributions come with serious tax headaches.

What Actually Happens When You Take Money Out

Traditional IRA Withdrawals

Pull out $10,000 before age 59½? Here’s the hit:

• Taxed as ordinary income
• 10% early withdrawal penalty (so another $1,000 gone)
• If you’re in the 22% tax bracket, you’re looking at roughly $3,200 in taxes and penalties alone—that’s nearly a third of what you withdrew
• State and local taxes? Add those on top

Roth IRA Withdrawals

Slightly less brutal, but still painful:

• You can pull out contributions tax-free anytime
• But earnings? Hit with taxes + 10% penalty if you withdraw early
• That “Roth is super flexible” thing? Only applies to what you already paid in

The Real Cost: Lost Growth Potential

Here’s what kills your retirement plans: compound growth. That $10,000 you withdraw today? Over 20-30 years, it could’ve turned into $50,000+ through investing. Gone. Vanished. And not just because you took it—because you can’t rebuild that time.

When You Can Actually Skip the Penalty

There are some loopholes, though they’re narrower than you’d think:

• First-time home buy: Up to $10,000 lifetime (yes, just once)
• Medical expenses: Only if they exceed a certain % of your income
• Disability or death: Actually covered
• Education costs: Qualified expenses only
• Unemployment insurance premiums: Specific situations
• Substantially equal payments (SEPPs): Basically, structured withdrawals over your lifetime

But catch this—even when penalties are waived, taxes usually aren’t. You still owe income tax on the distribution.

Better Alternatives (Before You Raid Your IRA)

1. Personal loans: Yeah, the rates suck, but your retirement stays intact
2. Home equity line of credit (HELOC): If you own property
3. 401(k) loans: Some plans actually let you borrow from them (unlike IRAs)
4. 60-day rollover gambit: You can withdraw and redeposit within 60 days, but mess up the timing and you’re toast

The Bottom Line

IRAs aren’t designed as emergency funds. They’re retirement-specific vehicles with rules built in to stop you from raiding them. Sure, you can take money out, but the tax bill + penalty + lost growth potential usually makes it a terrible financial move unless you’re in a genuine emergency and absolutely can’t use anything else.

Want to know if your situation qualifies for an exception? Talk to a financial advisor who knows the latest IRS rules—because tax law changes, and you don’t want to overpay.

Pro tip: Max out those contributions while you can, diversify your investments within the IRA, and review your plan annually. That’s how you actually protect your retirement.