Do's and Don'ts of Borrowing Against Your Traditional IRA

If you owe a debt you cannot pay, you might want to consider borrowing against your IRA. The federal government allows IRA holders to take out an interest-free, short-term loan, known as a "rollover" from their IRA.

However, borrowers must follow the rules carefully to avoid paying a penalty. Here are some do's and don'ts for borrowing against your traditional IRA:

Do: Pay the money back and place it into the same IRA or another traditional IRA within the 60 calendar day window required by federal law.

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Don't: Miss the deadline. If you do, the transaction will likely be considered a distribution and you'll owe income tax on it, according to Bankrate. In addition, you'll probably also owe a 10 percent early withdrawal penalty if you're younger than 59 and a half, the age at which the federal government begins allowing people to withdraw money from their IRAs without penalty.

The IRS can waive the 60-day rule if you provide a good reason, such as having been ill or misled by an adviser, reports Nasdaq.

Don't: Pay back less than the full amount you borrowed. Any money you don't pay back is a taxable distribution and may also be subject to the 10 percent early withdrawal penalty if you're younger than 59 and a half.

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Don't: Roll over money from an IRA less than 12 months after previously rolling money over out of the same IRA. IRA holders who break that rule will likely be fined 6 percent for making excess IRA contributions — and the IRS lacks the authority to waive that rule, according to Nasdaq.

Do: Consider withdrawing money from your IRA to help finance the purchase of a home. The IRS allows up to $10,000 in penalty-free withdrawals from your traditional IRA to be used toward a first-time home purchase, reports the Motley Fool.

Do: Consider looking into whether you're in any other situation in which the government may allow you to avoid a penalty for withdrawing money from your IRA. Penalties may be avoidable in situations involving such things as health expenses, medical insurance, educational expenses and disability, according to Charles Schwab.

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