If you need a loan but don't have a house, you may look at your mutual funds as collateral. The type of mutual fund account you own and the tax structure it holds will determine whether you can actually borrow against it. Understanding mutual fund loan regulations helps prevent accidental tax or fee liabilities.
Brokerage firms allow investors to use the value of their accounts as collateral for margin transactions. Margin transactions are brokerage transactions where you purchase securities with money you borrow directly from the brokerage firm. Once you qualify for a margin account, you can assess the loan at any time without additional paperwork. Margin accounts are granted based on credit history but can be revoked based on poor repayment history. When you borrow from your broker, you are allowed to borrow a maximum of 50 percent of your existing account value. This includes mutual fund values. If the value drops, you receive a margin call and must repay the difference. If you don't, the existing securities are liquidated to cover the margin costs.
Employer Retirement Plans
Employer-sponsored retirement savings plans like 401k and 403b plans allow investors to purchase mutual funds. The IRS allows employees participating in the retirement savings plan to borrow up 50 percent up to $50,000 of their account value. There is no credit check and loan interest is paid back to yourself with principal payments through salary reductions. You can take several small loans or one large loan, and there is no accelerated repayment demands if the value of the mutual funds drop in your retirement account.
Individual Retirement Account
An Individual Retirement Account is similar to a 401k or 403b provided to employees but is established independently by investors. Unlike a 401k or 403b plan, the IRS does not allow IRA owners to use the IRA for loan purposes in any fashion. This means you can't use the IRA funds for a margin account, for collateral or to take a direct loan. If you or your spouse pledge the IRA as collateral, the IRS penalizes you. The penalty is complete distribution of the IRA with taxes and penalties.
For mutual funds that are not used as margins or retirement savings, you may be able to use them as collateral for other loans you need. While you can not directly borrow from the mutual fund, you may be able to pledge a percentage of the mutual fund account for personal loans. This is dependent on the lender. Not every lender wants to assume the risk of collateral that is fluctuating regularly. You may be required to move the mutual funds assets into a money market or other fixed income asset while the money is pledged for a loan.