Can you take a loan on a Simple IRA?

The short answer to this is no, you can’t take a loan on your Simple IRA. There are several restrictions on the Simple IRA and one such restriction is that you can’t take a loan against it.

Taking a loan against something that protects your retirement such as the Simple IRA is not a good idea and is not advised by financial planners. However, in dire circumstances, you may have to take a premature distribution from your Simple IRA.

This means that you can take out money from your Simple IRA if you are younger than 59 1/2 years once in a 12 month period.

If you take a premature distribution, then you need to replace the money that you borrowed within a sixty day period. If you fail to do that then you will be charged a 10% penalty.

Tax Implications

If you decide to take an early distribution from your IRA before you reach the age of 59 1/2, there will be tax implications. You will need to fill out IRS form F5329 and declare the amount that you have taken as early IRA distribution. Normally, the tax liability will be 10% over and above your normal income taxes that you pay on your regular income. However this will depend on your specific case and you need to fill out Form F5329 to get a correct estimate of how much extra you will have to dish out.

Exceptions to the Tax

There are certain exceptions to the tax implications if you withdrew money from from your Simple IRA. These are conditions such as death or disability, payment for medical expenses which exceed 7.5% of gross income, payment for divorce settlements and retirement at the age 55 or above. Whether you qualify for these exceptions depend on your specific case and you need to consult a tax expert to get an exact picture of your case.


Taking a loan on a Simple IRA is not possible and early distribution is fraught with penalties in the form of excess tax or repayment default. All this makes tapping into your retirement fund such as the Simple IRA, the absolute last resort.

Simple IRA v/s Simple 401(K)

IRA and 401(K) are the most critical ways of having a steady income in your days of retirement. Most Americans opt for these plans to insure their future against any uncertainties. Hence, as an employer or employee it is very critical to choose the right plan. Though both the plans have certain common features, the differences too, are notable.

Employer Eligibility

If you already have a Simple IRA plan then you cannot have any other plan. So if you are still in the process of setting your IRA plan, ensure that your plan covers all the employees you want to get covered. Also if you have a large organization with 100 or more than 100 employees earning more than $5,000 annually, then you can’t set up Simple IRA or Simple 401(K) plan.
Both the above rules have certain exceptions. But those primarily take into account certain rare events like merger and acquisitions. Hence in your case, if its a normal situation, you can consider the above 2 conditions applicable to you.

Employee eligibility

For any employee to avail benefit of Simple IRA or Simple 401(K) plan, his/her age should be at least 21. Plus you should have been in employment for at least a year to join the IRA or 401(K) sponsored by the employer. You annual income should be at least $5,000.

Establishing the plans

Both Simple IRA and 401(K) plan should be established before October so that it can be used in that financial year.


Employees can make their eligible amounts of contribution anytime before the end of the financial year. In both, employers can make same amount of contributions like the employees. However, employer’s contribution should not exceed 3% of employees compensation in Simple IRA.

However, in Simple 401(K), this rule is further subject to an income limit of USD 220,000. Say an employee has a compensation of $400,000 and has a Simple IRA. Say his/her own contribution is $12,000. Then the employer can match up this contribution as 3% of $400,000 is equal to $12,000. However, if he/she has a Simple 401(K), then the employer contribution is limited to 3% of $220,000 which is $6,600 (considerably lower than the Simple IRA employer contribution).

All contributions are immediately forfeited to the employees. Simple 401(K) doesn’t have a provision for employers to make lesser contribution. However, in Simple 401 Individual Retirement Account (IRA) plan, employers can reduce contributions to as low as a per cent of the employee contribution. However, the employer can’t do low contributions throughout the tenure of employee’s service. He/She can do so only 2 times in a period of 5 years.

Using the plans

Often employees need to use the accumulations of plan. There could be some urgent need for money for a short time. Simple 401(K) plan can prove to be of real help under such circumstances. You can take a loan from your Simple 401(K). However, you cant do so from your Simple IRA.

So before you set up a retirement plan or join one, keep above points in mind and evaluate the plan accordingly. Remember, the retirement plan single handedly plays a crucial role in deciding how you will spend the last few years of your life.