What is an IRA Withdrawal and How Does it Work?

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Save more, spend smarter, and make your money go further

Most people hope to have a healthy retirement account built up by the time they’re ready to sunset their career. Many are making this happen; thirty-five percent of workers have upwards of $100,000 saved up for retirement, while 38% have less than $10,000.

Every penny counts when it comes to saving up for your retirement, but what about those moments when disaster strikes and you need some emergency funds? In these cases, you may start considering pulling from your individual retirement account (IRA), or think about taking an IRA loan. But, should you?

Can You Take Out an IRA Loan?

If you find yourself in dire straits, it can be tempting to pull from your retirement account. So, can you take an IRA loan? In short: no.

IRA loans simply aren’t an option offered. If you need to take money from your IRA, you’ll have to actually withdraw money from the account rather than take a loan. As is often the case with finances, this also isn’t a cut and dry matter; there are fees and penalties to consider with an IRA withdrawal.

IRA Penalties and Fees

When it comes to your IRA, the rules are plenty and strict. Essentially, if you aren’t at the legal retirement age of 59 ½, you need to have an extenuating circumstance that clears you of any fees. Outside of the exceptions to the rule, any IRA withdrawals will result in a 10% fee as well as taxes being taken out of the sum.

To qualify for a withdrawal that doesn’t have a fee, you need to experience one of the following:


  • Qualified first-time home purchase: If you’re purchasing your first home, you can take up to $10,000 from your IRA to use toward the cost. This also applies to spouses, meaning you can have a combined $20,000 to use. The money must be used within 120 days of withdrawal, so make sure you time it properly. (You can even use this money toward a child or grandchild’s house.)
  • College: You can pay for higher education costs for either yourself or your immediate family using IRA withdrawals. These costs include books, tuition, supplies, and other expenses.
  • Equal payments: If you agree to take equal distributions from your IRA until the age of 59 ½ or until your passing, you can avoid the 10% fee. Once you start, you can’t stop it, so make sure you’re absolutely sure you want to do it. After five years have passed you can adjust the frequency of the payments, but again, they can’t be stopped.
  • Permanent disability or death: If you become totally and permanently disabled you can access your IRA money without any penalty. Also, when you die your IRA funds can be accessed by your estate or beneficiaries without penalty as well.
  • Military deployment: If you’re in the reserves and you become active duty you can qualify for penalty-free distributions from your IRA after 179 days of active duty. This period is only active during your actual deployment, so you can’t make any withdrawals before or after.
  • Medical expenses: If you have medical expenses that exceed 7.5% of your gross income you can use money from your IRA without any penalty. If you’re unemployed, you can also use your IRA funds to pay for the health insurance premiums of you and your family, but must stop within 60 days of getting a job.


IRA Loan Alternatives 

Taking money from your IRA is a big decision that can take years of aggressive saving to make up for. You only get one shot at retirement, so if at all possible, consider some of the alternatives to a withdrawal from your IRA.

60-Day Rollover

If you’re taking your funds from one IRA account and rolling them into another IRA account, barring a Roth IRA, you can avoid the 10% penalty that comes with most IRA withdrawals. If you decided to keep some of the funds and only roll some of them into the new account, you’ll avoid the 10% fee still but will have to report the money as income on your federal tax return at the end of the year.

401(k) Loan

Your 401(k) account is a huge part of retirement, as it can grow over time and turn into a strong foundation for retirement. Still, emergencies do happen and you may find yourself needing to pull from your 401(k).

If you absolutely must, you may be able to take a 401(k) loan, assuming your account allows for it. If your account allows 401(k) loans, you can borrow up to 50% of your vested account balance or $50,000, whichever is less. The vested account balance is how much you actually paid into the account, not including the amount your employer matched and deposited.

The loan will have an interest rate that generally follows a formula of the prime interest rate is plus an additional percent. For further details on 401(k) loans, head on over here.

Private Loan

If you can, look into getting a private loan from a bank or credit union. If you have poor credit, see if you can get someone that trusts you to be a cosigner on your loan. This can allow you to get a loan you otherwise couldn’t obtain for credit reasons.

Generally speaking, private loans will have better rates than any credit card debt, and you can set the period over which you pay it to ensure the amount is feasible.

Saving for a Better Future

Saving for retirement is the second largest financial worry for adult Americans, right behind everyday expenses. Emergencies happen, so if you have to take money out of your retirement don’t let it eat away at you. And as always, consult with a financial expert before making any decisions.

The important thing is that you get right back into saving as soon as you can. Retirement doesn’t have to be a pipedream. Save as much as you can afford, and don’t let setbacks discourage you. You only have one future, so save up and make it the best it can be.

Save more, spend smarter, and make your money go further