Loan with condition of opening $100K account

Submitted by Jose Morales on Tue, 2019-07-09 16:56

I have a loan officer and relationship manager working with a client that extended an offer of a loan to the client on the condition that they open a $100K deposit account. The only source of funds that this client has to fulfill the condition is an IRA. This seems to be cutting very close to a prohibited transaction, however the loan officer and relationship manager are stating they didn’t specify the account had to be an IRA in order to avoid a prohibited transaction (although they were aware when they made the condition that the only source of funds was the client’s IRA), they are also stating that they aren’t asking for the account to officially be collateral for the loan, only that they client maintain the deposit as a condition of the loan (which sounds like it makes it collateral to me).

I’m scrambling to point to references that clearly show this scenario is not allowed. Any help would be appreciated.



Submitted by Alan - IRA critic on Tue, 2019-07-09 18:26

  • Hello. This is a tough one, but I agree with your thinking. Sec 4975(c) indicates the following – (E)act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account Note that this is much broader than merely encumbering the IRA. It sounds like even considering the IRA’s mere existence contributes to the granting of the loan. On the other hand, the IRS does not have a problem with non recourse loans for real estate in a SD IRA. Seems like a conflict to me. What happens if the client pulls back the IRA account after securing the loan?  I have heard stories of people creating temporary accounts to secure loans and then they close them, planning to do that from the start. I think that the actual encumbering of an IRA is just a simple and clear example of a PT that everyone understands, but that Sec 4975 as posted above is much broader. I don’t know how the IRS is actually interpreting this these days, but probably inconsistently is a safe bet.  


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