Can Retirement Accounts Be Used As Collateral?


Trying to use retirement assets as collateral or security for a loan has two major problems. First, the Internal Revenue Service expressly forbids it in the case of IRAs, Roth IRAs and IRA-based retirement plans. Second, lenders are reluctant to lend against retirement plans when much of the plan receives protection against creditors that would make it difficult or even impossible for them to collect the collateral if the loan were not repaid.

IRA plans

  • You may not borrow from an IRA or any IRA-based plan, nor may you pledge the IRA as collateral for a loan. If you do, the Internal Revenue Service will disallow the entire IRA, and deem you to have taken a distribution. This distribution would be fully taxable as income, and come with an additional 10 percent penalty if you are under age 59 1/2.

401(k) Loans

  • If your employer plan allows it, you can borrow from a 401(k). In this case, you call or write the 401(k) plan administrator. They send you a check, and you pay your own 401(k) plan back with interest. The remainder of the 401(k) balance serves as collateral for the loan.

Disadvantages of Borrowing Against a 401(k)

  • When you borrow against a 401(k), you must pay yourself back with after-tax money, even though you borrowed before tax money. The money you use to repay a loan will be subject to tax again when you take it out in retirement. This would, in effect, subject that portion of your 401(k) to double taxation. In addition, if you have a loan outstanding with your 401(k) and you lose your job, you may have to pay back the entire loan immediately. If you do not, the IRS will deem you to have taken a distribution and hit you with income tax and a 10 penalty if you are under age 59 1/2.

Margin Borrowing

  • A margin loan is a loan from a broker, using your account as collateral. However, since the IRS does not allow you to use a retirement account as collateral for a loan, you will not be able to open up a margin account using your retirement assets as collateral. You must open an account separate from your retirement accounts and use that as collateral instead.

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