Should You Use a Personal Loan to Invest in an IRA Quickly?

An individual retirement account (IRA) is an investment account individuals can use to save for retirement and get potential tax benefits. Unlike a 401(k), an employer-sponsored retirement plan, IRAs belong to the account holder and can be used even if you change jobs. 

Contributions to a traditional IRA are often tax-deductible, so you may be able to reduce your taxable income. Contributions to a Roth IRA aren’t tax-deductible but can be advantageous if you’re in a lower taxable income bracket than you expect in the future. Traditional and Roth IRA investment earnings are tax-deferred as long as the funds stay in the IRA. 

No matter which type of IRA you choose, if you need to withdraw the funds before you reach retirement age (59 ½ years), you may need to pay a tax penalty. You can’t access the funds without penalty, so IRAs aren’t an ideal place to store money you might need before retirement. 

In this guide:

• Tax deadlines to invest in an IRA
• How would you use a personal loan to invest in an IRA?
• Risks
• Should you use a personal loan to invest in an IRA?

Tax deadlines to invest in an IRA

If you plan to use an IRA to save for your retirement, remember it has tax deadlines and contribution limits. Each tax year’s contribution deadline corresponds with the standard federal tax return filing date, typically April 15 (the next business day if the filing date falls on a weekend or holiday). 

For the 2023 tax year, your total contributions to an IRA (traditional or Roth) can’t exceed the lesser of your taxable income for the tax year or $6,500 if you’re less than 50 years of age ($7,500 if you’re 50 years of age or older). 

A benefit of a traditional IRA is that your annual contributions may be fully tax-deductible. You must contribute to the IRA by the April 15 deadline for the tax advantages. Contributions after this date will apply to the next tax year, even if you filed a tax return extension.

You may consider other options if you don’t have enough cash to fund your IRA by the deadline, such as using a personal loan. We don’t recommend this strategy. If you’re considering it, we urge you to consider whether it’s worth the potential tax deduction before taking out a personal loan to fund your IRA contribution. 

How would you use a personal loan to invest in an IRA?

A personal loan is an unsecured installment loan that provides funding in one lump sum that you repay with fixed monthly payments of principal and interest over a short term (e.g., 24 to 84 months). Most personal loans have fixed interest rates, but some lenders offer variable rates. 

When lenders review personal loan applications for approval, they consider the applicant’s credit score. Plus, they evaluate whether the applicant has enough income to repay the loan. To measure the applicant’s ability to repay, lenders often want a debt-to-income (DTI) ratio of no more than 43%.

You can use many personal loans for almost any purpose. When you apply for a personal loan (often online), you must tell the lender how you plan to use the funds. If it isn’t allowed (e.g., investing in an IRA), the lender will decline your application. 

If your loan is approved, the lender will deposit the funds in your bank account within a few days. Once you receive the money, it’s available to use. This could include an electronic transfer to an IRA.

Risks of using a personal loan to contribute to an IRA

The primary reason someone might want to use a personal loan to contribute to an IRA is for the potential tax advantages and to save money on their tax bill. If you don’t have enough cash to contribute to an IRA, a personal loan could be a way to get quick funding to do this.

Using a personal loan to contribute to an IRA is possible, but this strategy is risky. The specific risks to consider include: 

• Your money might lose value. An IRA is a type of investment account. Suppose you borrow money to fund this account, and your investments (e.g., stocks, bonds) lose value. In that case, you may be in a negative financial situation that’s worsened because you’re also paying interest. 
• You can’t access the funds you invest without penalty. Once you’ve placed funds in an IRA, you can’t access the money before retirement without paying a tax penalty. So if you need to access the funds (e.g., because you’re having trouble repaying the loan), it’ll cost money.
• Your interest costs may exceed your tax savings. When you use a personal loan to contribute to an IRA, you commit to making payments for two to seven years of principal and interest. Your total interest costs might offset your tax savings depending on the rate and term you receive.
• You might put yourself in a worse financial situation. Not only will you incur interest by getting a personal loan, but it adds to the debt you must repay. Using a personal loan to fund your IRA might create an unnecessary financial burden you could avoid.
• Harm your credit score: To qualify for a personal loan, you’ll undergo a hard credit check, which can lower your credit score.

If you can max out your retirement contributions by using an IRA, you’ll benefit from long-term compound growth while lowering your taxable income for the year. However, it’s risky if you borrow money to make this happen. 

There’s an inherent risk with investing in any situation. When using personal loan funding to invest, even toward a tax-saving IRA, that risk is amplified, and you should take it seriously. 

Should you use a personal loan to invest in an IRA?

You may be able to use a personal loan to invest in an IRA, but it’s risky. Most people shouldn’t do so. Even personal loans with short repayment terms of 24 months carry average interest rates of 11.48%. These rates are lower than credit cards, but the interest costs can still add up.

Rather than using a personal loan to fund an IRA, a better option may be to use the money you would have spent on loan payments to fund an IRA for the next tax year. With this strategy, you would instead invest the money you may have lost on interest charges and allow it to grow. 

Besides investing for retirement, a common goal of contributing to an IRA is to get potential tax benefits. Even so, the annual tax savings from your IRA contributions might not cover the total interest costs you’ll pay on the loan, which is crucial to consider.

For instance, let’s say you borrow $6,500 with a 24-month personal loan at an interest rate of 11.48%. Depending on your tax bracket, the potential net tax benefit you received from using the personal loan to fund your IRA may be small or negative, as shown below for three tax brackets. 

2023 marginal tax rate	12%	22%	24%
IRA contribution	$6,500	$6,500	$6,500
Personal loan amount	$6,500	$6,500	$6,500
Personal loan interest rate  (24-month repayment term)	11.48%	11.48%	11.48%
Potential tax savings (IRA contribution x Marginal tax rate)	$780	$1,430	$1,560
Total interest costs	$806	$806	$806
Potential net tax benefit (cost) (Potential tax savings – Total interest costs)	–$26*	$624*	$754*

*Due to investment return fluctuations, there is no guarantee the return on your investment will be equal to or greater than 11.48%. Regardless, the APR remains at 11.48%, so this strategy might not result in an economic benefit over time, even if the table reflects a gain.

If you choose a longer repayment term for a personal loan, your total interest costs would be even greater. Plus, your interest costs could be higher or lower depending on the rate you receive. People with better credit scores often qualify for lower rates than those with lower scores. 

Let’s modify our example to use a 48-month repayment term (versus 24 months) at the same interest rate. (Note: The actual rate might be higher since longer terms often carry higher rates.) 

As shown below, the interest costs would be higher than the potential tax deduction in all three scenarios. 

2023 marginal tax rate	12%	22%	24%
IRA contribution	$6,500	$6,500	$6,500
Personal loan amount	$6,500	$6,500	$6,500
Personal loan interest rate  (48-month repayment term)	11.48%	11.48%	11.48%
Potential tax savings (IRA contribution x Marginal tax rate)	$780	$1,430	$1,560
Total interest costs	$1,637	$1,637	$1,637
Potential net tax benefit (cost) (Potential tax savings – Total interest costs)	–$857	–$207	–$77

Before using a personal loan to fund your IRA, compare the total interest costs to the potential tax savings for the IRA contribution. Also, remember the money you place in an IRA may lose value (depending on the investments it holds). This makes using borrowed money to invest riskier.

Also, many lenders don’t allow you to use a personal loan to invest in IRAs or other investments (e.g., stocks, bonds, mutual funds). For this reason, before deciding to use a personal loan to invest in an IRA, check to see whether your lender allows this. 

Using the personal loan proceeds for a disallowed purpose breaches your loan contract. Your lender may deem your loan in default and require immediate repayment in full with interest. Plus, if you lied about how you planned to use the funds on your application, this is a form of loan fraud.

Remember: There’s a risk the money you place in an IRA may lose value. Plus, you can’t access the funds you put in the IRA without penalty. Using a loan to fund the investment amplifies the risk. Consider this with extreme caution before proceeding.