Can I use my traditional IRA as collateral for a loan? No you cannot. It is illegal for a bank to loan you money based on your IRA as collateral. This is part of the tax law and differs from the way 401(k) and 403B accounts operate. On one hand he doesn’t seem fair to the people who are using an individual retirement account instead of the company-sponsored plan. However their advantages that you have by investing in an IRA that are not available to people with a 401(k) account so in the long run it probably evens out. However, it is easy to roll your 401(k) over into an IRA if you should choose to in the future. It is not necessarily easy to roll your IRA over to her 401(k).
If you have a 401(k) and think you might want to borrow against your retirement funds at some point in the future you should be very hesitant to roll out money over into an IRA. This is something you must consider when looking at possible financial maneuvers in order to avail yourself of available cash that you have in your retirement accounts.
However if you roll the 401(k) over into a Roth IRA you will have access to the principle I’m now at the time of the rollover. However, to avoid any types of fees or penalties you will only have this at your disposal five years after the rollover. This means you need to be extra careful in planning if you want to get access to retirement accounts in order to make sure they are rolled over to Roth IRAs at least five years in advance.
Not only can you not use your traditional IRA as collateral for a loan, you can’t borrow money directly from it either. Many 401(k)s allow you to borrow money either against your account value or from your account value depending on how the rules work. With an IRA you cannot do this. As mentioned before the Roth IRA will allow you to take money out as long as it does not exceed the principle amount invested. And this is subject to a five-year waiting period on amounts rolled over from a traditional IRA. If you put the money directly into a Roth IRA then you will not be subject to the five-year waiting period.
However, if you roll the money over from a traditional IRA you will not be subject to FICA taxes like you would if you put money into a Roth IRA with completely after-tax dollars. This is something to consider in financial planning but it’s really if some the laws passed that will require you to pay FICA taxes on your entire income instead of being limited to roughly the first $90,000.
So while there is another way to use your traditional IRA as collateral, there are several things you can do to avail yourself of the cash in your retirement account. However all of this needs to be done with careful of ice from CPA or qualified tax advisor in order to make sure you’re not overlooking any side effects or other situations that may affect your tax status.