Usury Laws applying to Roth IRA loans

[Guest LLane]

I am new to this board and trying very hard to get a correct answer to this question. IF I make a loan from my Roth Ira through the custodian, etc. can I charge 15% for example and be exempt from my state's usury law of 10% BECAUSE this is being done by and within my Roth IRA? I know that I am not wording this very well. I would appreciate any possible information back on the relationship of these two items..... one's ROth IRA making a loan and usury laws in a state...Thank you for your time and attentions to this question in advance. Sincerely, LL

[Guest RobO]

LLane.....Using Roth assets to secure a loan is a prohibited transaction. The amount secured is considered to be distributed from the Roth. That being said, because that specific dollar amount is no longer a "Roth IRA asset", it would be treated like any other cash amount used to secure a loan for purposes of your state usury laws.

[Guest LLane]

RobO,

Thank you for your reply. You do know I am speaking of giving not getting a loan right? Thanks, LLane

[Lame Duck]

Most usury laws provide certain exceptions to enforcement, such as credit cards charging 18+% interest or some automobile loans. However, if a loan is not specifically exempted, it would be subject to the laws. State laws are generally beyond the scope of these message boards. My suggestion is to consult with your attorney before making a loan in excess of the state 10% limit. I am assuming that there is adequate security for the loan, as any disinterested party would require and that the loan does not constitute a prohibited transaction.

[Guest Fishchick]

To whom would you be making the loan? If it is to you, your beneficiary, or any disqualified person, that would be a prohibited transaction. A disqualified person includes (from Pub 590 p. 41) "your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant." I believe that you also cannot make a loan to yourself in a capacity of a business owner or charity.

The effect of a prohibited transaction is that your IRA becomes no longer an IRA and is considered distributed as of the first day of the year. You could have major tax consequences in such a case.