Using an IRA as collateral for a loan is not allowed under federal tax law, and attempting it is expensive in a way you cannot undo. The moment you sign a pledge, the IRS treats the pledged portion as distributed to you — even though no money moves. If instead the IRA itself lends you the money, the entire account stops being an IRA on January 1 of that year. Both outcomes generate income tax, and often a 10 percent penalty, on funds you may never actually receive.
These rules apply to traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs alike. The IRS has confirmed that loans are not permitted from any IRA or IRA-based plan.1Internal Revenue Service. Retirement Plans FAQs Regarding Loans Employer-sponsored 401(k) plans can allow participant loans; IRAs have no loan provision at all.
Pledging Part of an IRA Triggers an Immediate Deemed Distribution
The statute is specific. If you use any portion of your IRA as security for a loan, that portion is treated as if it were paid out to you in that taxable year.2Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts – Section: (e)(4) Effect of Pledging Account as Security The pledge itself is the taxable event. The funds do not have to leave the account.
The distribution is permanent for the year. Repaying the loan the next day and releasing the collateral does not reverse it. There is no grace period and no corrective mechanism. IRS Publication 590-A confirms that the pledged portion is treated as a distribution and included in your gross income.3Internal Revenue Service. 2025 Publication 590-A
One narrow piece of good news: only the pledged portion is treated as distributed. The rest of the IRA keeps its tax-advantaged status. That is not true when the loan comes from the IRA itself.
Borrowing From the IRA Disqualifies the Entire Account
If the IRA lends the money to you, the account ceases to be an IRA as of the first day of that taxable year.4Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts – Section: (e)(2) Loss of Exemption The IRS treats the full fair market value of every dollar in the account as distributed to you on January 1, regardless of how much you actually borrowed. Once the account is disqualified, you cannot restore it. All future tax-deferred or tax-free growth on those assets is gone.
What the Tax Bill Looks Like
Whatever amount is deemed distributed — the pledged portion, or the full balance if the account was disqualified — goes on your federal return as gross income. For a traditional IRA, the whole amount is taxed at your ordinary income rate, because the contributions and earnings were never taxed before.
If you are younger than 59½, add a 10 percent additional tax on the amount included in income.5Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs It sits on top of the regular income tax, so a large deemed distribution can push you into a higher bracket and trigger the penalty at the same time.
Roth IRAs work slightly differently. The portion of a deemed distribution attributable to your original contributions is generally not taxed again, since those contributions were made with after-tax dollars. Earnings included in the distribution — and the full balance if the account is disqualified — are taxable unless the distribution meets the qualified distribution requirements, meaning the five-year holding period is satisfied and you are at least 59½.
Leaving the deemed distribution off your return can make things worse. The IRS may assess an accuracy-related penalty of 20 percent of the resulting underpayment if the omission is attributable to negligence or a substantial understatement of income.6Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Interest runs on any unpaid tax from the original due date. State income tax may apply too, depending on where you live.
How the IRS Finds Out
Your IRA custodian is required to file Form 1099-R reporting the deemed distribution. When the distribution results from a prohibited transaction, the custodian enters Code 5 in box 7, which signals to the IRS that the account is no longer an IRA.7Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 You get a copy of the same form.
If the 10 percent additional tax applies, you report it on Form 5329. The deemed distribution amount goes on Line 1 of Part I, and the resulting tax carries over to Schedule 2 of Form 1040.8Internal Revenue Service. 2025 Instructions for Form 5329
You Also Lose Bankruptcy Protection
An IRA that keeps its tax-qualified status is heavily protected in bankruptcy, with a federal exemption cap that adjusts for inflation and a separate carve-out for amounts rolled over from employer plans.9Office of the Law Revision Counsel. 11 USC 522 – Exemptions When a prohibited transaction disqualifies the account, that shield disappears. Courts have held that they can independently evaluate whether an IRA was properly maintained, regardless of any prior IRS determination. A trustee or creditor can argue the funds are no longer protected retirement assets and should be available to pay debts. For someone already in financial trouble, which is often the reason for looking at retirement funds in the first place, that loss compounds the damage.
Legal Alternatives If You Need Cash
A 401(k) Plan Loan
If you have a balance in an employer-sponsored 401(k), 403(b), or governmental 457(b) plan, and the plan document allows it, you can borrow from that account. The IRS permits plan loans of up to the lesser of $50,000 or 50 percent of your vested balance.1Internal Revenue Service. Retirement Plans FAQs Regarding Loans The loan must carry a reasonable interest rate, be repaid within five years (longer for a home purchase), and be offered to participants on a reasonably equivalent basis. Not every plan offers it. Ask your plan administrator.
A 401(k) loan is not a taxable distribution as long as you meet the repayment terms. Default on it and the outstanding balance is treated as a distribution, with the 10 percent early distribution penalty if you are under 59½.
The 60-Day Rollover
You can withdraw funds from an IRA and redeposit them into the same or another IRA within 60 days without owing tax on the withdrawal.10Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Some people use this window as a short interest-free bridge.
The risks are real. You are limited to one IRA-to-IRA rollover in any 12-month period across all of your IRAs combined. Miss the 60-day deadline for any reason and the entire amount becomes a taxable distribution, potentially with the 10 percent penalty. Your custodian will also withhold 10 percent for federal income tax when it sends the check unless you elect out; to avoid tax on the withheld portion, you would need to roll over the full original amount using other funds to cover the shortfall. The IRS may waive the 60-day deadline in limited circumstances outside your control, but that waiver is not guaranteed. If you are considering this route, you need a firm, dated plan to put the money back.