Answer by Randy Carey: It would be a prohibited transaction. An IRA cannot be used as collateral for any type of loan.
Answer by Ken Golliher: From page 44 of the 2010 Publication 590.
Pledging an account as security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions....
The IRA custodian or trustee would have to sign any pledge of the account. With the right lawyer, the borrower could probably prove in court that the trustee or custodian's incompetence was the real problem.
First published on BankersOnline.com 5/28/12