Private Lending with a Self-Directed IRA

private lending with IRA money

Opening a self-directed IRA (SDIRA) unlocks multiple retirement investment options for you beyond the basic stocks, mutual funds and bonds. SDIRAs offer the same tax advantages as standard IRAs, with the added benefit of greater portfolio diversification.

One of the ways your self-directed IRA can help you build a nest egg is through loans because you can lend money from your SDIRA. Learn more about how lending with IRA money works, the rules for self-directed IRA lending, and if a self-directed IRA can borrow money.

Can A Self-Directed IRA Loan Money?

Self-directed IRAs (SDIRAs) can issue loans, turning the retirement accounts into miniature banks. The amount you can lend to others is limited to the amount in the account, but otherwise, there aren’t any minimum balance requirements. You can start lending from your SDIRA if you have $1,000 in the account or $100,000.

You control the lending process when you use your SDIRA to issue loans. You can choose the interest rate you charge, the term of the loan and the amount you’re willing to lend. You’re also in charge of choosing the people or companies you’ll loan money to, although there are some restrictions.

When your self-directed IRA makes loans, you establish the following:

  • Loan amount
  • Interest rate
  • Loan term
  • Payment terms and amount
  • Type of loan

Who Can Get a Loan From a Self-Directed IRA?

Your SDIRA can decide who to lend money to, with some exceptions. Under IRS rules, the self-directed IRA can’t lend to any disqualified persons. That means you can’t borrow from your self-directed IRA, nor can your relatives or anyone connected to the retirement plan, such as the IRA provider or custodian.

Otherwise, you can choose who to lend to, whether it’s a stranger from the internet, a startup looking for funding or a close friend who needs money.

What Are Self-Directed IRA Lending Options?

You also have full say over the type of loans your SDIRA will make. You can choose to offer unsecured loans, meaning there isn’t any collateral behind the loan. With an unsecured loan, there’s no protection for the SDIRA if the borrower can’t repay, but you might charge a higher interest rate.

Secured loans have collateral behind them, such as a car or another piece of property. If your SDIRA is large enough, you might be able to use it to issue mortgages to borrowers. If the borrower stops paying back the secured loan, your self-directed IRA has the right to seize the collateral. You can then sell the collateral to recoup some or all of your losses.

can i lend borrow and lend money from my ira?

What Are the Benefits of Lending From an SDIRA?

The most significant benefit of lending money from your self-directed IRA is enjoying a decent return on investment (ROI). Your ROI depends on several factors, a few of which you can control. The loan length, the amount borrowed and the interest rate all influence the ROI. The higher the interest rate and the longer a borrower needs to repay the loan, the more you can earn.

You might also feel good about using your SDIRA to lend money, especially if you lend to borrowers who have limited loan options. Plus, you get all the tax advantages connected to an IRA and can enjoy the benefit of further diversifying your retirement portfolio.

What Are the Risks of Lending From an SDIRA?

Any investment has risks, including lending from an SDIRA. One of the most significant risks is that you could lose your money. If you make an unsecured loan to a borrower who then stops paying it, you can lose the principal amount, plus any interest the SDIRA would have earned.

You can reduce risk by performing due diligence before making the loan. Ask for an application, check the borrower’s credit history and check references. You want to lend to borrowers with the highest chance of repaying the debt.

Can A Self-Directed IRA Borrow Money?

You may be wondering if a Self-Directed IRA can borrow money. The short answer is yes, you can also use your self-directed IRA to borrow money, mainly if you’re using the SDIRA to invest in real estate. You can apply for a non-recourse loan in the SDIRA’s name. The property the SDIRA purchases acts as the collateral on the loan.

An important thing to know about getting a non-recourse loan through your SDIRA is that the lender can only go after the SDIRA, not you if the loan defaults. The lender can seize your SDIRA but can’t try to seize any other investment property or assets owned by you.

Other Factors for Self-Directed IRAs Borrowing Money

Another important part of self-directed IRAs borrowing money is that the IRS has regulations in place that states the debt must be “non-recourse.” This means that the IRA owner doesn’t have a personal guarantee on it.

Most Important Self-Directed IRA Loan Rules

Before you start lending from a self-directed IRA, there are a few important rules to know before you start:

  1. Due diligence: The first rule is to do due diligence before lending to anyone. Your SDIRA provider or custodian will not do this for you. It’s in your best interest to vet any potential borrowers and set the loan terms based on the information you uncover.
  2. Disqualified persons: The second rule concerns disqualified persons or who you can and can’t lend money. If the borrower is related to you or has a business connection to you, you can feel confident that the IRS considers them disqualified.
  3. Lending activity: All lending activity comes from the self-directed IRA. You and your SDIRA are entirely separate entities. Any money you lend comes from the IRA. If you contribute $1,000 to your SDIRA and then lend it to someone, you need to deposit the money first. It also means that any profits, such as interest earned, need to go back into the SDIRA. The borrower should make payments in the name of the self-directed IRA, not your name.

If you are borrowing with your self-directed IRA to purchase real estate, there are a few more rules to note. You can’t use your SDIRA to buy a home to live in. Similarly, you can’t buy a house for your brother or children using a non-recourse loan or any funds from your SDIRA.

Contact Accuplan to Learn More About Self-Directed IRA Lending

contact Accuplan to learn about self-directed IRA lending

Accuplan has been providing self-directed IRAs since 2007. If you want to diversify your portfolio while enjoying the tax benefits of an IRA, we can help you get started. In addition to using a self-directed IRA to lend money or purchase real estate, you can decide to invest in cryptocurrency, precious metals and many other assets.

We’ve made it easy to open an account and get started. If you have any questions about self-directed IRAs or using your SDIRA to lend money, contact us today.  

This information shouldn’t be relied upon for investment advice but is for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice. 

Subscribe to Our Newsletter!

Get industry related news, tips, tricks and techniques for alternative investing.