Can an IRA Be Used as Collateral?

The purpose of an Individual Retirement Account is to provide retirement income.
IRAs also provide tax benefits. IRAs come in two basic forms: Traditional IRAs and Roth IRAs.

Types

Traditional IRAs can provide a present deduction for some or all of the contribution, depending on income. They also provide tax deferral. Roth IRAs do not provide a current deduction from income. Roth IRAs provide tax deferral and tax-free income at retirement.

Considerations

IRS publication 590 provides detailed information about IRAs, including prohibited transactions. Prohibited transactions for IRAs include that money cannot be borrowed from an IRA nor can an IRA be used as security for a loan.

Effects

Lending institutions are generally aware that using an IRA for collateral is a prohibited transaction and will not collateralize IRAs.

Potential

An IRA may be eligible to be transferred into a qualified plan, such as a 401(k); many qualified plans have loan provisions. Roth IRAs allow for withdrawal of principal contributions. A new account could then hold the funds as collateral for a loan.

Warning

Exercise caution when withdrawing funds from an IRA account to avoid premature distribution penalties.

References

• Internal Revenue Service: Publication 590 (2008), Individual Retirement Arrangements (IRAs)