We see a lot of questions regarding loans from an IRA account. The short answer is you are not allowed to take a loan from an IRA or IRA-based plans such as SEPs, SARSEPs and SIMPLE IRA plans. You also are not permitted to roll over an outstanding loan balance from a retirement plan into any of the aforementioned account types.
If you borrow money from an IRA by mistake, the IRA is no longer an IRA, and the entire value of the IRA would need to be included in income the year the loan was taken.
However, qualified plans are a particular type of retirement account that loans may be taken from. Qualified plans may allow loans but are not required to, and the plan can limit the amount that can be borrowed. The maximum amount that can be permitted is (1) the greater of $10,000 of 50% of your vested account balance or (2) $50,000, whichever is less. There can be multiple loans at a time; however, the balance of all outstanding loans must be below the stated maximums above. There are other rules that can apply to qualified plans that you can find here.
Loans are generally not taxable if they follow the rules of the loan set in place. If the loan is never repaid, the loan would be classified as a taxable distribution of the entire outstanding balance of the loan. If the participant failed to make payments and the loan was deemed a taxable distribution, the participant can still make payments after the distribution occurred. These payments would increase the tax basis in the plan.
Due to COVID-19, there have been some expanded distribution options that may be more favorable than taking out a loan due to the restrictions above. These options are eligible for qualified individuals. You can find the requirements and changes here.
Overall, while you can’t borrow from your IRA, if you borrow from your qualified plan, make sure you know the rules of the loan and how to repay it, so you don’t have any surprises at tax time.
If you have any questions, please contact your Henry+Horne advsior.
KC Kolb, CPA