An individual retirement account, or IRA, is one of the most popular ways to save and invest money because of its tax benefits and advantages.
When you contribute to your IRA, you’re adding money to your account that’s used to purchase investments like stocks, mutual funds, and bonds. The accountholder can withdraw money from their IRA when they reach retirement age or earlier, but with a penalty.
The primary advantage of an IRA is that contributions are tax-deductible up to certain limits. When you contribute to your IRA, you reduce the amount of money you owe in taxes. Other benefits, that come with a Roth IRA, include tax-deferred investments. This means if the principal investment earns money, as long as it stays in the IRA, no taxes are due on those earnings.
Contributions for IRAs are in addition to what people can add to their 401(k) or any other employer-sponsored retirement program.
Tax Deadlines to Invest in an IRA
While an IRA is a great way to have an investment account, it entails certain tax deadlines and contribution limits. For a Roth IRA, the deadline to open an account is April 15. The deadline to contribute is also April 15, and no extensions are allowed.
For the 2018 tax year, if someone is under 50 and is contributing to an IRA, the maximum contribution they can make is $5,500. For people over 50, the maximum contribution is $6,500.
To take advantage of the tax-deductible elements of an IRA contribution, you must adhere to the deadlines and contribution limits. People who want to contribute to their IRAs before the April 15 deadline but don’t have the extra cash on-hand may consider other options.
One such option is using a personal loan. Is this strategy worthwhile for the tax deduction?
What Is a Personal Loan?
Personal loans are used to gain access to cash that has to be repaid over time. They are typically unsecured, meaning they don’t require collateral. When a lender is deciding whether or not to approve a personal loan application, they’ll primarily look at the credit score of the applicant.
Personal loans are also considered installment loans, meaning they have a fixed repayment term that usually ranges anywhere from two to seven years. The interest rate is typically fixed as well.
With personal loans, there is a sense of convenience. Borrower can apply for these loans online, most people who are approved received funding directly into their bank account within a few days, and the funds can be pretty much used for anything.
What Are the Pros of Using a Personal Loan to Contribute to an IRA?
The benefit of using a personal loan to contribute to an IRA is primarily that you can save on your tax bill. If you don’t have the cash to contribute by the deadline, with a personal loan you can provide funding fairly quickly and then you gain the tax deduction benefit.
Timeliness is important because you have a deadline each year in which you can contribute. If you don’t make the deadline, you can’t go back and contribute for that year. If you can max out your retirement plan, you’re getting the benefit of long-term, compound growth, paired with a taxable income that could be lower by thousands of dollars.
What Are the Cons of Using a Personal Loan Toward an IRA?
There are possible downsides of using a personal loan to contribute to an IRA. First, if you’re paying interest on money that you invest, you need to earn more to break even on your investment. An IRA is first and foremost an investment account. So, if you borrow money to fund this account and then your stocks lose money plus you’re paying interest, you may find yourself in a negative financial situation.
Also, how likely are you going to be able to pay the loan back? Interest rates on personal loans add to their costs and you need to consider your ability to pay back any loan before you apply. If you don’t have the cash-on-hand to contribute to your IRA, you may be already struggling financially. Would you create an unnecessary burden on yourself by taking out a loan you must pay back?
There is an inherent sense of risk with investing in any situation. When using personal loan funding to invest, even toward a tax-saving IRA, that risk is amplified and should be taken seriously.
Author: Ashley Sutphin