It is sometimes possible to use a pension plan as collateral

By Malcolm Berko Published: March 29, 2009
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Dear Mr. Berko: I have had to spend a lot of money to refurbish my office. I tried to borrow about $42,000 from my bank of 16 years (I have a 675 credit score) but they hemmed and hawed and sort of let me know they did not want to make me a loan, especially when they said my loan could cost me 14 percent.

I considered a home equity loan, but our home is worth about $27,000 less than our mortgage. My wife, who has been my business partner for 12 years, suggested we use our retirement account as collateral at the bank for the $42,000. The value of our plan is $314,000, we are the only participants and $142,000 of it is in a Charles Schwab Money Market account, which has no risk.

So our question to you is: Can we use our pension account as collateral at the bank for a personal loan, and would the money be tax deductible?

We have a good business and have made a decent income every year since I started this company in 1992.

D.S., Cleveland

Dear D.S.: I can’t give you an answer unless I read your pension plan, something I will go to great lengths to avoid.

Some plans allow the participants to borrow, some don’t, and those that allow it probably have restrictions and limitations. I strongly recommend you take this retirement plan to the attorney who drew it up — most are cookie-cutter plans — to be "posolutely and absurtively” certain that your plan has the necessary language to authorize loans to a plan participant.

However, even if your plan provides for a loan, it could limit the amount you are allowed to borrow. The maximum a plan can permit as a loan is either "the greater of $10,000 or 50 percent of your vested account balance or $50,000, whichever is less.”

And in almost all cases with which I’m familiar, your loan must be repaid within five years and the payments must be "made in substantially equal amounts” and must be made at least on a quarterly basis.

Interest may cost
Because you and your better three-quarters are the only participants, your vested interests at this time must be 100 percent.


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