Private Lending through a Self-Directed IRA

Published on February 21, 2018

Did you know that your self-directed retirement plan can lend money to others? Unsecured and secured loans are among the many nontraditional investments allowed through self-direction.

Your self-directed IRA can lend money to privately held companies (including startups), extend loans for private school or college tuition, real estate development, rehab projects, home purchases, and other creative projects … the options are nearly limitless. While the returns are not guaranteed, private lending transactions can be a great way to diversify one’s retirement portfolio.

The lowdown on unsecured or secured loans through self-direction

The investor chooses the borrower and (as with all self-directed transactions) conducts due diligence on the investment. It is important to understand your state’s lending laws as well as market interest rates and reasonable terms and maturity date (lenders typically include an amortization schedule in their notes). Real estate loans are typically secured by a mortgage or deed of trust (depending on state laws).

The investor is responsible for working out all the loan terms with the borrower. These details are documented and submitted to a company like Next Generation, who will then sign on behalf of the IRA, execute the loan instructions on behalf of the IRA, and hold the assets.

A self-directed IRA can fund either secured (backed by collateral to ensure repayment) or unsecured loans (which may be associated with higher risk). Again, these decisions are at the discretion of the investor whose retirement plan will lend the funds. One vital aspect of these transactions is to ensure your IRA is not transacting with a disqualified person—this creates a prohibited transaction according to IRS guidelines. For example, loaning money to yourself personally from your IRA is prohibited. So is lending money to any of the individuals or entities as explained here under IRS regulations.

A self-directed retirement plan can invest in a broad array of alternative assets beyond loans (and mortgages). Other nontraditional investments include real estate, private placements and precious metals. All gains generated by the investment flow back into the retirement plan and are tax-deferred until distribution (or tax free if held in a Roth IRA). All expenses related to an asset are paid by the plan.

Self-directed plans at Next Generation Trust Company

At Next Generation Trust Company, we provide all the forms you’ll need to open a self-directed retirement plan and to start investing in alternative assets of your choice. Our sister firm, Next Generation Services, provides all the transaction and administrative support so that all aspects of your transactions are handled under one umbrella. When opening up a self-directed IRA, (see our starter kits), our team will answer any questions and guide you as needed for making a secured or unsecured loan through your retirement plan. Contact us at 1-888-857-8058 or info@nextgenerationtrust.com, where you’ll find all the support you need to start taking control of your future today. We look forward to working with you!