Don't Pledge Your IRA For Any Loans | Ed Slott and Company, LLC

Don't Pledge Your IRA For Any Loans

Most of us have loans of some sort, whether it's a mortgage on our home, a car loan, student loan, etc. Or maybe you're thinking about applying for a new loan. In order to get the loan, the bank or other lending institution might require you to have some collateral or pledge some assets as security for the loan. However, if you have an IRA, you can’t use it as collateral for any personal loans.

IRS rules do not allow you to pledge any part of your IRA as security for a personal loan. This rule applies whether it’s a loan for you or for someone else, such as a loan for your son’s college tuition or your daughter’s home mortgage.

If you do pledge some or all of your IRA as collateral for a loan, the amount that you pledged will be treated as distributed to you. That means if it’s a traditional, SIMPLE, or SEP IRA, you will be taxed on that amount. The IRA custodian should send you a copy of IRS Form 1099-R showing a withdrawal. It’s treated as if you actually took that amount from your IRA and spent it. Accordingly, you will owe federal income taxes on the amount. If you’re under age 59 ½, you’ll also owe an IRA 10% penalty for an early distribution. So, in addition to paying interest on the loan, you will owe Uncle Sam for the taxes and penalties for wrongly pledging your IRA – not a good financial move.

Ideally, the bank, credit union, or other lending institution would not allow you to pledge your IRA as collateral for a loan. Hopefully, when they see the account is an IRA, they would stop you from pledging it. But don’t rely on the lender to know the rules; it’s your responsibility. The IRS would not give you a break on paying the taxes on the deemed IRA withdrawal if you claim it was the bank’s fault.
 


-By Joe Cicchinelli and Jared Trexler

 

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