Private Lending IRA

When you choose to undertake a self-directed Individual Retirement Account, your options unfold with much broader choices than the more traditional IRAs and investments. In addition to the better-known options like stocks and bonds and mutual funds, you can also invest in opportunities like real estate, precious metals, patents and copyrights, or private lending.

Private lending may be the least understood of IRA opportunities, in part because it doesn’t involve a tangible asset like real estate or gold. Nevertheless, it should not be overlooked; it can prove to be a lucrative avenue for investing in your retirement.

Private Lending through your IRA can also afford you the opportunity to offer loans to companies, individuals, or enterprises that you would like to fund. With options including both secured and unsecured loans, you have plenty of choices when it comes to putting your money to work.

The Private Lending IRA: How It Works

A self-directed IRA is one that allows you to choose your own ventures, and to broaden your portfolio beyond the bounds of traditional Wall Street investments. In the case of private lending, that investment takes the form of a loan made to a person, business, or institution you choose.

You can ensure that the investment is safe by choosing to offer a secured loan, where the borrower puts up real property as security and insurance on the loan. (If they were to default, you’d get the property.) You can also opt to offer an unsecured loan, if the circumstances are right—just realize that there’s a greater risk when you don’t have collateral on the loan.

Unlike real estate IRAs or precious metal IRAs, you are not required to hire a “custodian” middle-man to handle the investment, because you (or more accurately, your IRA) is not taking ownership of any physical assets. Having said that, many people feel more comfortable with an experienced broker who knows the ins and outs of lending laws.

The earned interest or profits from your lending activities are protected by their inclusion in your IRA. In the case of a traditional IRA, that means taxes are deferred until you take distributions; with a Roth IRA (where you have paid tax up front on the money you put into the fund) they are entirely tax free. These funds are subject to all the restrictions and benefits of any money in an IRA.

Precautions with the Private Lending IRA

If money-lending is new to you, it’s a good idea to educate yourself before you embark on offering loans through your IRA. Here are some precautions to take into consideration.

• When you’re offering a secured loan, don’t loan on something you wouldn’t want to own. If you should have to foreclose, that’s exactly what would happen.
• Don’t loan to someone you don’t want to foreclose on. Of course a foreclosure is not the expected or desired outcome, but foreclosures do happen. IRA Private Lending gives you the chance to help out a friend or family member, but keep the full ramifications in mind when you make your decision.
• As you structure the terms of your loan, remember that this is your money, so you get to make the rules. You can insist on having your borrower use professionals (like appraisers or inspectors) to help you evaluate the deal.
• Structure the loan so you will be collecting payments monthly. This gives your borrower a monthly reminder of the obligation, and gives you a heads up to potential problems if missed payments raise a red flag.
• Insist on title insurance for the loan, as well as the appropriate hazard coverage like flood or storm coverage. Make sure your IRA is named as an additional insured on the policy.
• Require evidence of payment on property taxes, HOAs, and any other obligations attached to the property. If you should have to foreclose and then find out that taxes are owed, it’s an unpleasant surprise to find you have less equity in the property than you’d imagined.
• Do your due diligence on the property and the borrower. Consider background checks and credit checks, and don’t be afraid to require a co-signer. If you’re loaning to a business, ask to review the financials.

If you pay attention to details like these, you will have protected yourself and your investment, and you will be well positioned to benefit from loaning out your IRA funds.

In the event of a borrower defaulting on a loan, your IRA’s foreclosure might inadvertently turn you into a real estate investor. Keep in mind that the repossessed property will not revert to you personally, but will be included under the umbrella of your IRA.

Advantages of the Private Lending IRA

Some people choose to invest their IRA funds in real estate, but find themselves saddled with the headaches attendant on property ownership, like dealing with maintenance and tenants. Providing a loan allows you to get involved in investment opportunities—even including real estate deals—without the hassles of actual ownership. It’s another way to get a “piece of the action.”

When you set your IRA up to provide private loans, you get to decide the terms of the loan. That includes the length of the loan, the frequency of payments, the collateral, and the interest rate. You are not tied to current interest rates or the restrictions imposed by banks; you can structure the loan in whatever way pleases you.

Many people see their ability to grant loans as an avenue for doing good. That can mean giving a financial hand up to someone whom you find worthy despite their rejection for a standard bank loan. It can mean funding an enterprise or outreach that you value. It can mean investing in your community through building loans or development investments.

Unlike Real Estate IRAs, which strictly limit you from entering into any transaction that might be considered a conflict of interest, Private Lending IRAs do not prohibit you from loaning money to friends or family members, not to mention companies or organizations with which you are involved. Where you see a need or a place you’d like to help, you have the power to offer a loan through your IRA. It’s a win-win situation, where the borrower gets a needed loan and your IRA grows with the earned interest.

Of course you could make any of these loans with personal money, but the advantage of doing it through your IRA is the tax deferment and growth of your retirement investment. Your earnings are tax deferred or tax exempt (depending on which type of IRA you start with), and your IRA assets are protected if you were to file for bankruptcy. And rather than having your money sitting idle in an account, you can send it out in the world to come back with interest.

Once you have a structured loan agreement in place, you can sit back and collect payments and interest with minimal hassle!