lending money

Did you know that you can essentially turn a Self-Directed IRA into a lending institution? You can
lend retirement account funds out to qualified individuals and companies via promissory notes with the benefit of earning interest on the loans. Becoming a private lender is a popular alternative investment choice for many of our Self-Directed IRA holders. 

Lending money: how the process works

First, it’s important to understand that since you’re lending through your Self-Directed IRA, IRS rules apply.  There are certain people or entities to which you cannot lend. However, that list is very small.  These are known as disqualified people and include you, your spouse, lineal ascendants or descendants, parents, grandparents, children, grandchildren and their spouse, and any entity that they own more than 50% interest. That’s it! That leaves a lot of people and entities to lend money to! 

Your IRA can issue a secured or unsecured promissory note. With a secured real estate note you will also create a mortgage or deed of trust. You will draft the promissory note, and the borrower will sign it, along with any related loan documents. 

You should always remember that your IRA is the lender, not you, the IRA holder. This means that all income goes back into the IRA. All IRA loan documents must be in the name of the IRA, not your personal name.

Here are some of the options for lending money with your Self-Directed IRA:

  • Bridging loans to companies that seek debt finance
  • Residential and commercial mortgages
  • Equity participation loans
  • Equipment financing
  • Automobile loans
  • Microloans for small businesses
  • Personal loans
  • Non-performing notes
  • Debt-financed loans

Benefits of lending money with your Self-Directed IRA

1. You set the terms. One of the main advantages to lending is that you are able to predetermine the terms of the loan. You decide on the loan amount and the person or business to which you are lending. You can also set the interest rate, payment amount, payment frequency, and the length of the loan. You can choose if it is a secured or unsecured loan. Securing the loan often involves real estate but other assets can also be used as collateral with secured notes.  

2. Potential for excellent returns and maximum future profits. Lending money is a great way to increase your retirement savings over time. You are creating a pre-established return on your money by setting the terms for principal and interest. For many, this leads to steady, secure income coming back into the Self-Directed IRA. Additionally, when the loan is secured by assets such as real estate or other assets, you are ultimately investing in both the borrower and the asset pledged as security since that asset will be available to you if the borrower defaults on the loan.

3. Help others who might not otherwise be able to get a loan. Lending money with your Self-Directed IRA may be a way to help an individual or business that has previously been unsuccessful in getting a loan. There are plenty of creditworthy people or entities out there that may be unable to secure financing from a bank for various reasons. However, it is extremely important to do your own due diligence regarding the potential borrower. 

4. Make sure you perform your due diligence. Many people interested in lending money enjoy the process of finding potential loan candidates, including doing their own due diligence about possible borrowers. These are some factors to consider and key questions to ask: 

  • Who is the person, people, or company looking for a loan?
  • What is the security? If it is a business, is there a proven track record?
  • Are there any financials that can be reviewed before making a loan?
  • What happens in the event of a default? If the loan is secured by real estate, it is the promissory note and mortgage that secures the loan. If a default does occur, you would be able to foreclose and take the property back, which can be done in a Self-Directed IRA.

These are just a few questions to ask. Always do your due diligence!

5. Tax advantages. Another advantage of Self-Directed IRA lending is that you are able to make loans while keeping all tax benefits associated with IRA accounts. All profits from this type of investment are tax-deferred until you start taking distributions from your Self-Directed IRA if it is a traditional IRA or tax-free if it is a ROTH IRA. The distributions from your traditional retirement account are not required until you reach the age of 72. If you have a Self-Directed Roth IRA, there are no distribution requirements.

These advantages may appeal more to some than others, but they are great benefits to consider if lending money interests you as an investment option for your retirement account. IRA Innovations can help set you up with a Self-Directed IRA, then serve as your administrator for lending money as well as other alternative investments, such as real estate related assets and private company investments.

Learn more about the basics of Self-Directed IRAs from IRA Innovations in Birmingham, AL.
IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a Self-Directed IRA.


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