How to Make a Loan From Your Self-Directed IRA
Published on January 8, 2024
Among the many ways investors can diversify their retirement portfolios is through investments in alternative assets in a self-directed IRA. But did you know that individuals can also earn tax-advantaged retirement income by making a loan from a self-directed IRA?
As our CEO, Jaime Raskulinecz wrote in her Forbes Council article on this subject, investors may use their retirement accounts for various forms of private lending from their self-directed IRA—to other individuals or businesses—as we detail below.
Different types of loans from self-directed IRAs
Owners of self-directed IRAs can make unsecured loans (no collateral), secured loans (with collateral—an asset of value), and private mortgage notes (promissory notes secured by real estate assets). Here are some important points to keep in mind before your IRA lends money:
- If you arrange a secured loan, be sure that the collateral is something the IRA can accept should the borrower default.
- Securing the loan often involves real estate—one of the most popular asset classes in self-directed IRAs; but other assets (such as a vehicle, savings account, and future paychecks) can also be used as collateral with secured notes.
- However, artwork and collectibles are among the few assets that are not allowed in self-directed plans.
- Be aware of your state’s rules for private lending in a self-directed IRA. The usury laws for your state and the borrower’s should be checked. At Next Generation, we always recommend that clients consult appropriate counsel when making these investments.
- With a secured real estate note you will also create a mortgage or deed of trust. After you draft the promissory note, the borrower will sign it, along with any related loan documents.
- All IRA loan documents must be in the name of the self-directed IRA (a Traditional or Roth IRA or other type of account that can be self-directed), not the account owner’s personal name. The payments are made to the IRA and tax-advantaged income is earned as the loan is repaid.
- As with all investments made through self-directed retirement plans, self-dealing is prohibited and a loan may not be made to disqualified persons (the account owner, spouse, lineal antecedents or descendants, and any entity in which the account owner owns more than 50% interest).
As “self-directed” implies, the loan terms are determined between the two parties (lender and borrower)—amount, length of time, payment schedule, and interest rate. And as with any self-directed investment (and lending money is indeed an investment in the borrower and future account growth), the account owner should do full due diligence on the borrower’s ability to repay the money. Plan ahead and plan well for what may happen if the borrower defaults on the loan!
Lending options with a self-directed IRA
Whether long-term or short-term, loans from a self-directed IRA may be made for many reasons and financial needs. Loans can be used for residential and commercial mortgages, personal loans to pay off debt, business financing, and more. For example:
- A small business needs to purchase an expensive piece of equipment.
- A business owner wants to buy the building that houses the company.
- A friend wants to invest in a small multifamily property and lacks the full down payment.
- Individuals may need funds to cover student debt or medical debt.
- Someone you know needs a new car to get to work.
- A company seeks a bridge loan for debt financing or to meet payroll during a downturn.
As a full-service administrator and asset custodian of self-directed retirement plans, the team at Next Generation is here to answer your questions about the many types of investments allowed through self-directed, including unsecured and secured loans. You can schedule a complimentary educational session to find out more, or contact us at NewAccounts@NextGenerationTrust.com or (888) 857-8058.Back to Blog