Using Roth IRA as collateral for a loan
I am 73 and wish to use my Roth IRA as collateral for a loan. Since it has already been taxed, it doesn’t matter if it is treated as a distribution as no tax is due. I am using IRC Sec. 408(e)(4) as authority. Thoughts please?
Permalink Submitted by Alan - IRA critic on Thu, 2023-08-17 20:10
Whether you just take Roth distributions to eliminate the need for a loan or pledge your Roth as collateral that will result in a prohibited transaction distribution of your Roth IRA reported under Code 5 on your 1099R, you will lose the benefit of future tax free gains that could have been generated in your Roth IRA. If your Roth balance is larger than the loan, there is also a risk that the entire balance could be reported as distributed.
Permalink Submitted by David Mertz on Thu, 2023-08-17 20:34
CFR 1.408-1(c)(2) indicates that any prohibited transaction involving an IRA disqualifies the entire account as of the first of the year in which the prohibited transaction occurs. There seems to be no point in knowingly performing this prohibited transaction in favor of taking a regular distribution. With the Roth IRA ceasing to be an IRA as of the beginning of the year, any investment gains that have occurred during the year that would otherwise be treated as tax-free income would be treated as taxable income instead.
Permalink Submitted by Alan - IRA critic on Thu, 2023-08-17 23:21
Good point about the current year gains. Seems like there should be a 1099R for the value of the Roth on 1/1 and then 1099 DIV, 1099 INT or even 1099B forms for any sold investments during the year.