You may be like many people, where their retirement account is their largest source of capital, and it can be tempting to use your IRA accounts as collateral for an unsecured loan. It is in direct violation of IRS regulations to borrow from your individual retirement account directly.
Pledging the IRA as collateral is also strictly forbidden, and the IRS will consider the amount that you borrow or put up as collateral a deemed distribution, and it is subject to the penalties and taxes that are placed on early IRA distributions.
This is true for both traditional IRAs and Roth IRAs. There are however, loopholes that can allow you to utilize the funds in your IRA tax and penalty free.
Withdrawing funds from your IRA can have steep tax and financial implications, and should be considered carefully. Discuss your options with a qualified financial professional such as the retirement specialists at ETrade.
IRA Accounts As Collateral: Rollover To A 401k
While you can not use your IRA accounts as collateral, you may be able to borrow against your 401k plan. If your employer offers a 401k plan you can ask the plan administrator if you are allowed to rollover your IRA into your 401k.
The IRS allows this type of rollover, and the majority of administrators will agree – although this is not the typical rollover. Your plan administrator can provide you with the necessary paperwork.
Your IRA administrator can provide you with a distribution form, and after your IRA has been liquidated, you will have 60 days to deposit the funds into your 401k. Once you have filled out the required paperwork, signed them and submitted them, you can then deposit the funds into your 401k plan.
When the funds have been deposited, you can then request loan paperwork from your 401k plan administrator. The IRS allows this type of loan where you are borrowing a percentage that is outlined by the policies in your 401k against your retirement account’s value.
IRA Accounts As Collateral: “Rollover” Your IRA
If you are in need of a short term loan – 60 days maximum – there is a way to “rollover” your IRA, get access to capital, and not pay a dime in fees or taxes. The most important thing to remember is you have to repay all of the funds within sixty days.
If there is even a shadow of a doubt that you will not be able to repay all of the money within the sixty day time frame, then do not even consider this strategy. The rules governing IRA rollover are firm, and sixty days does not mean two months, and there is no allotment for weekends and holidays.
By using this strategy, you are taking advantage of your ability to rollover your IRA, which you can exercise only once every 12 months. You are permitted by law a sixty day “grace period” in which to transfer your funds.
As the law does not require you to move the funds to a new account, you can actually “borrow” your money interest and penalty free, use it however you need to, and then re-deposit the money back into your IRA.
You also only have to “rollover” the original withdrawal amount, and the payment is interest-free. You can also choose to withdraw your funds minus the 20% “mandatory” withholding. As long as you return the funds to your account within the sixty day time frame, this is the best of all possible solutions.
This is an excellent option if you are in immediate need of capital – for a real estate deal, or other investment – and you are sure you can repay the full amount within sixty days.
Although you can’t use your IRA accounts as collateral, there are ways around the rules governing borrowing against your IRA. Always consult with your retirement account specialist at ETrade, or a trusted financial adviser.
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