Use of Individual Retirement Account as Collateral -- OK in Florida?

[Guest lifeweb]

Can you use your IRA as collateral on a loan in Florida? My initial understanding was no, but when I read on it appears that depending on the state, it is permitted. Does anyone have any experience in using an IRA as collateral? Thanks for your help.

[Guest Paul McDonald]

It is a prohibited transaction to use your IRA as a security for a loan. If you engage in a prohibited transaction in connection with your IRA account at any time during the year, it will not be treated as an IRA as of the first day of the year. The result would be that the fair market value of all (or part, in certain cases) of the IRA assets would be included in your gross income for that year. You may also have to pay the 10% tax on premature distributions. See IRS Publication 590 for details of the feds requirements. I am not aware that the State of Florida would allow you to do something that the federal government doesn't.

[Dave Baker]

You might be thinking of a state statute or state case law that says a bank (wearing its "lender" hat) can't take as collateral from the borrower something for which it is acting as a "fiduciary" (wearing its "trustee" hat) on behalf of the borrower.

I think cases in some states say that the bank is out of luck in such a situation. But maybe it's murky when the bank is only the IRA "custodian."

At any rate, whether the bank later can get the IRA funds or not is not the IRA owner's biggest problem -- as Paul points out, a pledge of the IRA (by signing a collateral agreement as part of some loan) would blow up the whole IRA for tax purposes at the get-go, so I can't see how it would ever be something an IRA owner would want to do.