If you recently opened a self-directed IRA, you may be excited to explore all of the new investment opportunities available to you.

One advantage of using your retirement account to invest is that you have access to dormant funds that build over time.

If you have tens of thousands or even hundreds of thousands of dollars sitting in an IRA, you could invest in assets not ordinarily available to retail investors, such as Peer-to-Peer (P2P) lending.

If you’re interested in self-directed IRA private lending, we’ve created a complete guide on P2P lending with an IRA to help you understand the rules and best strategies for success.

Private Lending with a Self-Directed IRA

Private lending, also known as peer-to-peer lending, allows investors to issue loans directly to individuals, businesses, or other entities, playing the role of the traditional bank or lending institution. As part of this arrangement, the private lender sets the repayment terms, including the duration of the lending period and interest rate.

When loans are paid in full, this investment strategy can yield higher earnings at a quicker pace when compared to other investment assets. That can provide a welcome lift to your retirement account, but few standard investment vehicles allow for funds to be leveraged as such.

The most straightforward way to engage in P2P lending with a retirement account is through a self-directed IRA (SDIRA). A self-directed IRA is a specialized retirement account that gives you unparalleled control of how, where, and when you invest your retirement funds. You can hold a wide range of assets in your portfolio, including promissory notes and mortgage notes, allowing you to issue loans using funds from your SDIRA account.


When you invest in tax liens, earnings come from the interest applied to the lien

Secure vs. Unsecured Loans

When you issue P2P loans using your SDIRA, you control the terms. This includes whether you want to issue secure or unsecured loans.

Secured loans require the borrower to put up collateral, such as a home or vehicle, as part of the lending agreement. If the borrower doesn’t repay the loan, the lender can seize the asset.

Secured loans often present less risk to the lender and, therefore, come with lower interest rates.

Unsecured loans don’t require collateral. If the borrower doesn’t repay the loan, the lender has no recourse to recoup their losses, though a lack of repayment is still likely to damage the borrower’s credit.

Unsecured loans typically have a higher interest rate because of the increased risk to investors.

Pros and Cons of Private Lending with a Self-Directed IRA

If you’re considering P2P lending to grow and diversify your retirement portfolio, there are some benefits and drawbacks to keep in mind.

Pros of Private Lending

  • Potential for higher return based on the lending terms.
  • Control over the lending terms, such as the interest rate, loan period, and type of loan (secured or unsecured).
  • Earnings are tax-advantaged and do not count towards the IRS annual contribution limit.

Cons of Private Lending

  • If unsecured loans are not repaid, you can lose the amount borrowed and the opportunity for interest earnings.
  • Legal action may be required to force repayment or seize collateral attached to a secured loan.
  • Due diligence is required by the lender.

Tips for Performing Due Diligence

The main risk of private lending is that the borrower won’t meet their end of the bargain. Thoroughly understanding the risks associated with a specific lending opportunity can help you lower your risks. Here are some things you can do to ensure due diligence.

Research the borrower. According to Kent Clothier, CEO and Founder of Real Estate Worldwide and The Boardroom Mastermind, one of the first things you should do is research the borrower. Even a Google search can lead to revelations about a potential borrower, including any lawsuits, legal judgments, or other issues that may make them a risky candidate.

Leverage the right tools. An online search for borrower information can help jumpstart the process, but it isn’t enough to complete due diligence. Fortunately, there are several tools you can use to further vet a potential borrower. The American Association of Private Lenders suggests turning to credit reports, loan origination systems, landlord websites, and borrower entity documents if funding an LLC or other business entity.

If you’re lending for a real estate purchase, it’s also wise to vet the property. You can do so by turning to your local MLS, real estate professionals in your area, automated valuation models (AVMS), and appraisers.

Determine the borrower’s ability to repay the loan. Assess the borrower’s income and assets, credit history, etc, to determine their ability to repay the loan.

Review any pertinent business plans. If lending to a business, thoroughly review their business plan to determine the likelihood of full and timely repayment.

Speak to an expert. If you’re unsure if a lending opportunity is right for you, or if the applicant is a worthy investment, speak to a professional. This can be important in any lending scenario, but particularly so if you’re lending to a business and are unfamiliar with the industry.

Private Lending vs. Hard Money Lending

Both P2P loans and hard money loans are issued by private individuals or entities and not traditional financial institutions.

The primary difference between private lending and hard money is using an asset to secure the loan. Private lending can use secured or unsecured loans, and the decision lies with the lender. Further, P2P loans can be issued for an array of purposes, such as real estate purchases, vehicle financing, and personal loans.

Hard money loans are short-term loans primarily used for real estate dealings, and they are always secured with a “hard” asset. The collateral is typically the asset for which the loan is used, such as a home.

Increasing Retirement Savings

If you’re looking for a steady stream of income to augment your retirement payouts or to boost your portfolio savings, then private lending with a self-directed IRA is a great investment. While risks abound in every industry, performing the right due diligence and assessing your comfort level will help you navigate any potential shortfalls you may encounter.


What is the minimum investment required for SDIRA private lending?

There is no minimum investment required for SDIRA private lending. Investors can issue loans with lower face values, such as $1,000 or as high as $1 million or more.

What are the tax advantages of using an SDIRA for private lending?

The major tax advantage of using an SDIRA for private lending is that funds in your account grow tax-free. If you have a Traditional IRA, taxes are paid on qualified withdrawals and based on your income tax bracket. Roth withdrawals are generally tax-free since taxes are paid upfront. You may have to pay taxes on withdrawals from earnings if they are withdrawn before 59 ½.

Are there any prohibited transactions when using an SDIRA for private lending?

Yes, all SDIRA dealings, including private lending, are subject to IRS-prohibited transaction rules. Specifically, you cannot use SDIRA funds to extend a loan to a disqualified person, which includes your descendants and ascendants, your account custodian, and any business in which a disqualified person has 10% or more interest.