We’ve all heard of or taken out a loan in our lives, and it’s usually through a bank or another financial institution. What most IRA owners don’t know is that they are allowed to lend out the funds in their IRAs in the same way. The idea is that your funds can be loaned out and used to invest in real estate, small businesses, land, pretty much anything. Your IRA is acting as the financial institution.
Now, a regular IRA cannot loan out funds, but a self-directed IRA can. Since you’re loaning out through your self-directed IRA, the IRS rules will still apply when it comes to WHO you can loan the money to. Self-directed IRA funds can be loaned out to anyone who isn’t a disqualified person. That includes you, your spouse, your children, or your parents. The same rules still exist for private lending that exists for self-directed IRAs.
Setting the terms
One of the main draws to private lending is that you’re allowed to predetermine the terms of the loan. First, you obviously can set the amount that you’re loaning to the person seeking the loan. You can also set the interest rate, the payment amount, and the length of the loan. You can choose if it’s a secured or non-secured loan. Securing the loan can be done through real estate, cars, pretty much anything that you choose. Note that the value of the item does not have to be equal to the loan amount.
No IRA is too small
Even if you have less than $20,000 in your IRA, or even just $5,000, the beauty of private lending is that you’re still one hundred percent allowed to loan out your funds. If you have a lower amount of money in your IRA, you’re also able to combine funds from your IRA and funds from another IRA to loan out.