If you borrow from your individual retirement account, or pledge it as security for a loan, your account is no longer qualified as an IRA on the first day of the tax year in which you did the borrowing or pledging. You are considered to have received a distribution of the entire value of your account at that time. Using your IRA as a basis for obtaining a benefit is also a prohibited transaction.
Do not rely on the financial institution or lender to keep you out of trouble. It's your responsibility and your problem. If you disqualify your traditional IRA you will be taxed on the entire amount. And if you are under age 59 1/2, there will be a Federal tax penalty of 10%. Residents of California will be also pay state income taxes and another tax penalty of 2 1/2%. It doesn't matter what financial product you have used to fund the IRA. It could be a mutual fund, a CD, annuity, or a number of other products. The tax treatment is the same.
Using your IRA to secure financing will probably give you the most expensive money you have ever borrowed.
Posted by C. Thomas Thames