Loan from Rollover IRA

[fatir43]

I need to take a loan of about 60000 USD from my 401K to invest in a business along with my brother. The money will be returned within 2 months. Is there a way to get the amount without paying 10% penalty?

I am 35 year old and I already own homes (Can't be the first time home buyer)

[DoninGA]

IF the 401(k) plan allows a loan then there are no penalties assessed on the loan.  The loan is not reported on a tax return.

There are no early withdrawal penalty exceptions for funds withdrawn from a 401(k) for a first time home purchase.  The penalty exception is only if the funds are withdrawn from an IRA for a first time home purchase and then only the first $10,000 withdrawn is eligible. 

[TomD8]

If you default on a 401K loan, the unpaid amount is considered a taxable distribution, and a 10% early withdrawal penalty is assessed if you are under the age of 59 1/2.

[dmertz]

Note:  A 401(k) is not an IRA.  Your question title says it's and IRA but your question says it's a 401(k).

If it's an IRA, the money you take out of your IRA is not a loan from the IRA, it's a distribution from the IRA regardless of what you do with the money and putting the money back into an IRA within 60 days would be a rollover.  You are limited to one IRA-to-IRA distribution and rollover in any 12-month period; violation of this rule results in an excess contribution subject to penalty.  There is 10% default tax withholding on an IRA distribution unless you specify to the custodian that no taxes are to be withheld.

However, if it's actually a 401(k):

Even if the 401(k) plan permits loans, 401(k) loans are limited to $50,000 or 50% of the balance to your credit in the 401(k), whichever is less.  So to take $60,000 out of your 401(k) at least some of the distribution would have to be a regular distribution.  However, if you are still working for the company, you are not permitted to take a distribution of your elective deferrals before age 59½ (except as a hardship distribution, and using the money to fund an investment in a business would not qualify as a hardship) and the 401(k) plan might not allow any in-service distributions.

If you allowed to take a distribution and do so, there will be 20% mandatory tax withholding on the amount distributed.  To be able to complete a rollover of the entire distribution within 60 days and avoid a taxable distribution subject to penalty you'll have to replace the amount withheld for taxes with money from another source while the tax withholding is tied up with the IRS until you file your tax return and get a refund.  (Of course if you had another source of money you would probably not be contemplating a distribution fro the 401(k).)

The risk of not being able to complete a 401(k) or IRA rollover within 60 days is often rather high when the money is used as temporary funding for something.  Under these circumstances, the likelihood of ending up with some amount of taxable distribution that is also subject to the 10% early-distribution penalty is usually quite high.

[fatir43]

It was an old employer's 401K, which is now rolled over into an IRA.

[VolvoGirl]

So it is no longer in a 401K account.  Now it is a IRA, not a 401K.       IRA rules apply.

[macuser_22]

As dmertz said,  you cannot take a loan from an IRA - you can only take a distribution which can be rolled back withing 60 days from the date of the distribution but one one such rollover per year is allowed.   The 60 days is absolute - wait 61 days and it will not qualify for a rollover, also don't wait to the last minute since some financial institutions can take up to 3 business days to post a rollover which counts to the 60 days.

[SweetieJean]

Sounds too risky to me.  Is Brother unable to find another short term loan somwhere?