Collateral loans are backed up by an asset of equivalent or greater value than the loaned amount; a savings account loan is simply a collateral loan in which the lender has the right of offset against the available funds. These loans have also gone by the term ‘passbook loans’ and can be backed by a number of different types of assets, including homes, precious metals, and automobiles.
IRA Loan?
Individual retirement arrangements do not allow loans; this is only for approved annuity and government plans. However, Federal rules and regulations allow up to six transactions every month for transfers or withdrawals, and allow unlimited access through an ATM. For ira’s, early, unqualified withdrawal penalties still apply. Before making a withdrawal from money that is steadily compounding interest, a loan should be considered.
A collateral loan backed by ira savings is a simple and fast process. For a fee which varies depending on the repayment date (generally two weeks to one month,) loans in excess of $1,500 can be wired within 48 hours or less if approved. Although fees can be as much as 15-20%, it beats taking money out of an ira and incurring immediate taxation, as well as a 10% penalty; opportunity cost of interest accumulation is lost as well.
Alternatives
As mentioned, several transactions can be made every month with the ira account. One way of initiating a short term loan is to rollover funds into another account. Rollover and conversion rules give the transfer a 60 day grace period to be completed in without being taxed as income. To prevent the move from being considered a taxable and/or early distribution, the funds would need to be replaced before the grace period expires.
Note that the IRS is clear to classify these actions as ‘prohibited transactions,’ so proceed with caution; the consequences could be a severe tax bill if the IRS decides to invalidate the account. An alternative to manipulating the ira is to take out a loan against a 401k, if it exists. Loans from this account are often low interest, short term loans. Because the funds are borrowed from the entity managing the account, they should be executed quickly.
Considerations
Taking a loan out against savings is a last resort, and rather than being a solution to a short term cash deficit, can cause problems. If the funds are desperately needed due to sudden unemployment, disability, or another unexpected circumstances, the problem may not be rectified in time to be able to make good on the loan.
The key to a short term savings loan is having a clear plan to pay it back, and exhausting every other option before applying for one. Speak with friends and family who might lend the money, and consider opening a new line of credit. Taking on this additional debt may not be the best solution, but it buys time to pay, and provides an emergency resource if managed properly.
Shop for the best rates on saving account loans before applying, and be prepared to provide account information and personal information to complete the loan process.
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