Lending Money to a Business through Your Self-Directed IRA

Published on September 16, 2014

Signals from the Federal Reserve indicate that interest rates will be slowly rising in the near future (early 2015). For business owners who have lines of credit or adjustable rate loans, this will have an immediate impact on their bottom lines because it will cost more to borrow money from the bank.

Rather than hold off on needed capital to improve company infrastructure or grow their business, business owners can borrow funds from other people’s self-directed retirement plans. Yes—the alternative assets within self-directed retirement plans may include private placements, secured loans (guaranteed by the asset), unsecured loans (without any collateral) and even mortgages.

Are You a Self-Directed IRA Owner that Needs an Infusion of Cash?

If you own a self-directed IRA, and you know a business owner who could use an infusion of cash, you can make a loan from your account. You and the borrower work out all the terms of the loan such as interest rate and payment schedule. Because the transaction involves a self-directed account, the IRA makes the loan and the payments go to the IRA (all funds flow in and out of the account, not between the individual parties). As with all self-directed transactions, the account holder is responsible for conducting all the necessary due diligence about the investment before sending instructions to the account administrator, who executes the transaction.

Making Loans from a Self-Directed IRA

You can make unsecured or secured loans from a self-directed IRA to help someone pay for personal needs such as college tuition, a down payment for a home, or to purchase a car; or your self-directed retirement plan can lend funds to finance a business transaction (such as new equipment or capital improvements). Self-directed IRAs have helped business owners open or expand restaurants, update their computing infrastructure, and get through a cash flow crunch. Other ways that self-directed IRAs have made unsecured loans are investments in Broadway shows, as startup capital, and even shares of a race horse; these accounts allow for many nontraditional and diverse types of investments.

Next Generation Trust Services Can Answer All Your Self-Directed IRA Questions

As an administrator of self-directed retirement plans, Next Generation Trust Services can answer your questions about these types of alternative investments, and our transaction specialists will alert you to any issues surrounding disqualified individuals or prohibited transactions (see an earlier post about this topic for more details). We recommend that our clients consult with their tax professional before sending us the instructions for making a loan through their self-directed plan.