How to Lend Money with Your Self-Directed IRA

Self-directed IRAs give you the power to invest in a variety of businesses and products that you wouldn’t be able to utilize with a traditional IRA, but they also allow you to lend out money without actually buying a stake in the company or product. This is a great alternative if you want a slightly lower-risk opportunity that still has the potential to pay off quite well.

Lending money from a self-directed IRA isn’t a very complicated process, but it is one that has to be completed carefully. If you make mistakes when setting up the loan, or picking who you loan money to you can end up losing a lot of money.

1.    Carefully choose a person or company to lend money to. Research the person or company and ensure that they are a worthy cause.

2.    Sit down with a lawyer and decide on the loan term as well as the interest rate that you believe is fair and profitable.

3.    Establish collateral on the loan such as real estate, or an automobile to protect you in case the loan goes bad.

4.    Submit all of your loan documents to your custodian for approval and a sign off so that the money can be released.

5.    The custodian will send the money to the borrower so they can make use of it.

6.    The borrower will make regular payments to the custodian according to the terms of the contract.

When you are loaning money to a business or individual out of your IRA it’s important to understand that it’s not your money, it’s the IRA’s. In other words, any contract that you make has to be in your self-directed IRA’s name, not yours. The administrator of your account is the one who has to sign off on the loan agreement, and if the loan ends up being profitable all of those profits have to be rolled back into the account to avoid being penalized. That’s why it’s vital to get professional help when setting up the loan, especially when having the documents drawn up.

The necessity to keep all the loans out of your name does have some drawbacks by complicating matters, but there are benefits as well. For instance your retirement account will be earning money and you won’t have to worry about managing the loans, instead you have the custodian to handle that. In other words, if you choose your loans properly you’ll have a steady stream of income coming into your retirement fund and you won’t have to devote time to managing it.

How to Lend Money with Your Self-Directed IRA