IRA Distribution Rules
Money may be borrowed only from qualified retirement accounts. Qualified retirement accounts are designated as accounts that bear the designation of 401(k) plans, RET plans and Profit Sharing or Pension Plans. Most IRAs including Roth IRAs are not considered qualified retirement plans. The difference between a qualified and non-qualified plan is determined by the status of the funds that are invested in the plan. Qualified plans are funded through pre-tax dollars while a non-qualified plan is funded using after-tax dollars.
Some investors believe that it is possible to borrow money from an IRA plan and repay those funds within the sixty (60) days that the Internal Revenue Service allows for reinvestment. It is important to note that the Internal Revenue Service does not consider these funds a loan however, they are considered a distribution.
The differentiation in terms is critical to understand because of the way these funds are handled. For example, assets that are held in an IRA plan are not eligible to be used for collateral while those that are held in a qualified plan may be eligible depending on the policies of individual banks. Loans from qualified plans have specific repayment agreements attached to them and depending on specific circumstances, these payments may be suspended for various reasons. In addition, most qualified plans have rules about adding funds while a loan is being repaid.
IRA account distributions are not considered loans as there is no mechanism in place for enforcing repayment. If an accountholder decides to put the funds back into the account within 60 days then there is no further penalty associated with the distribution. However, if they do not repay the funds that are distributed, there is a tax liability but no legal obligation to replace the funds. In these cases, it is merely considered a distribution for tax purposes. The classification of the distribution is based on the age of the accountholder at the time of distribution. Those who are aged 59 1/2 or older may not have to pay penalties if the funds are not returned to the IRA account. There are other exceptions where the distribution may not incur additional penalties.