5 dos and don'ts when lending money to loved ones

Moreover, you shouldn’t tap into your emergency fund to loan money; reserve those funds for a rainy day of your own. And if you decide to use some of your retirement savings to help out a

loved one, make sure it won’t throw your long-term plans off track. “You should always prioritize your own financial security before lending to family, no matter how much you want to help,”

Towers says. “If lending will jeopardize your retirement, it’s simply not worth the risk. Think of it like being on an airplane: They always tell you to put your oxygen mask on first before

helping others. It’s sound advice in this situation.”  Another thing to consider: If you have to pay any penalties for the funds you loan out — early withdrawal fees on a certificate of

deposit (CD) or individual retirement account (IRA), for example — consider factoring those costs into the loan amount. DO GET IT IN WRITING Before you give a loved one money, get the terms

and conditions of the loan down on paper. While you might trust the person to keep their word, having an agreement in writing can ensure there’s a legal obligation to do so. You could have

an attorney craft a loan agreement, or create one using an online legal resource such as LawDepot, Nolo or Rocket Lawyer. A promissory note — a document in which the borrower promises to

repay the other party a specified amount of money — will often suffice in these situations, Argyle says. The contract “should include key details, like whether you’ll charge interest, the

repayment schedule, due dates and any consequences if the loan isn’t repaid,” Towers says. “You might even consider having another family member sign as a witness. For an added layer of

legitimacy, you can also have the contract notarized at your local bank.” A signed agreement reduces the potential for disputes and “preserves goodwill,” Argyle says. It’s also important

tax-wise if the borrower fails to repay the loan.  “If you aren’t repaid, you may be able to claim a bad debt deduction, but only if you can prove the loan was legitimate,” Towers says.

The loan contract provides this evidence. DON’T FORGET ABOUT THE IRS When planning your loan, make sure you take into account the potential tax implications. These will depend on where you

source the money, financial and legal professionals say. "If you have to pull it from your IRA, you are incurring [income] taxes to get the money,” says Pat Simasko, an elder law and

estate planning attorney at Simasko Law Offices in Mount Clemens, Michigan. (This is only true for traditional IRAs, withdrawals from which are taxable; with Roth IRAs, you pay income taxes

on these before putting money in the account.)