You Can’t Borrow From An IRA

March 9th, 2009  |  Published in 401K

The question of whether or not you should rollover an IRA comes up a lot and my general rule of thumb has been that rolling over a 401(k) to an IRA is usually a good thing. There are exceptions to the rule but in general it’s always better to go with a low cost mutual fund provider like Vanguard Group or Fidelity, rather than the home grown funds your employer has. In the cases where the plan administrator is a large mutual fund company like Vanguard or Fidelity and they do offer low cost mutual funds, it might not be that big of a deal. My first employer was large enough to run the 401(k) in-house and so our funds were home brews. They were perfectly fine funds, they just had your average actively managed expense ratios and I was looking for the sub-1% Vanguard index funds, so I left.

However, there might be one reason why you might not want to leave your 401(k) – loans. With a 401(k), you can get a loan from your 401(k) and then pay yourself the interest. In general, it’s not a good idea because your funds can’t grow because you’ve borrowed them. Don’t be fooled by the interest payments, you’re still paying yourself and your money isn’t growing. However, borrowing from the 401(k) might be better than borrowing from a bank, or worse. With an IRA, there’s no opportunity to borrow… you can’t borrow from an IRA at all. There’s a little loophole that lets you “rollover” the funds but that restricts you to sixty days, you have to deposit the funds within 60 days or it counts as an unqualified distribution and you owe taxes and a 10% penalty.

So, the next time you consider rolling over an IRA, remember that you lose the ability to borrow from it.

  

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