Financial Counseling Certification Program (FiCEP) Practice Exam

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Are loans allowed on a Traditional IRA account?

  1. Yes, they are allowed

  2. No, they are not allowed

  3. Only for specific financial hardships

  4. Only if the account holder is over 60

The correct answer is: No, they are not allowed

A Traditional IRA (Individual Retirement Account) is designed primarily for retirement savings, and the contributions and earnings within it grow tax-deferred until withdrawal, typically during retirement. One of the fundamental characteristics of Traditional IRAs is that they do not permit loans. This is a significant distinction between IRAs and some other types of retirement accounts, such as 401(k) plans, which may allow for loans against the balance. The prohibition of loans protects both the integrity of the retirement savings structure and the long-term investment potential of these accounts. Allowing loans could lead to individuals borrowing from their retirement savings instead of allowing those savings to grow for future needs, which undermines the primary purpose of the IRA as a long-term retirement vehicle. Additionally, while some may think of exceptions like financial hardships or age-related withdrawals, these do not apply to loans. Instead, withdrawals from a Traditional IRA can incur taxes and penalties depending on the circumstances surrounding the withdrawal, but they do not involve a loan structure. Therefore, the assertion that loans are allowed on a Traditional IRA is not accurate.