How a Self-Directed IRA for Private Lending Works

How a Self-Directed IRA for Private Lending Works

When you use a Self-Directed IRA, one of the most immediate and obvious benefits is that you get to choose investments that you normally would not have available through a traditional arrangement. For example, many employees who have a 401(k) plan through work only have a limited amount of stock funds to choose from. However, with a Self-Directed IRA, there are plenty of options at your disposal. And one of the most powerful options for many is that of private lending.

Why private lending? Like any other investment, this will include some risk in your portfolio. However, many retirement investors turn to private lending for a few reasons:

  • For example, extending a small business loan to someone with a solid plan for building a business can be a great asset to have in a Self-Directed IRA. Not only is this asset something different than the traditional stocks/bonds paradigm, but it means that an investor will be able to diversify their retirement assets with something unique. In other words, a private loan is an asset that functions on its own merits. This brings diversity to a portfolio that does not otherwise have private lending assets associated with it.
  • Passive income. With a private lending note within a Self-Directed IRA, the investor then receives regular payments when the lender is on time. That means that the portfolio receives passive income. In that way, private lending can function much like a real estate asset that generates regular income. Rather than worry about whether a stock will go up or down, the investor only has to sit back and let the terms of the loan do the work.
  • Tax benefits. One reason people turn to a Self-Directed IRA is that they can utilize tax benefits that are extremely powerful. As we note at our Private IRA lending page, “In the case of a Self-Directed Roth IRA, your IRA can even receive interest payments tax free – provided the account has been open at least five years and you are older than age 59½.”

With these specific benefits in mind, it is also important to consider how the private IRA might end up looking in the portfolio.

Private IRA Lending in a Self-Directed IRA

The most immediate benefit to using a Self-Directed IRA is that it puts the investor in control. You are no longer beholden to the limited options predetermined for you by a company. You can now make your own choices. Working with a Self-Directed IRA administration firm, you will be able to call the shots, using the full range of available investment options to choose from. That includes:

  • Real estate
  • Precious metals
  • Private IRA lending
  • Tax liens
  • Private companies
  • Joint ventures

And the list goes on. In fact, the IRS makes it simpler by limiting what you can’t use in a retirement account when you self-direct. For instance, you will not be able to use collectibles such as art or wine within a retirement account.

You should also keep in mind that the same rules of retirement investing will still apply. That means that you have to keep your retirement investments separate from your personal benefits. This is easy to do with a 401(k) plan through work since the account is naturally separate from the rest of your personal benefits. But with a Self-Directed IRA, you will find that you have to consciously avoid including personal benefits within a retirement account. Private lending should be done by keeping your personal life and your retirement investments separate, just as you would not use a Self-Directed IRA real estate property for someone you know.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at