One of the primary reasons investors turn to self-directed IRAs is the flexibility and freedom they offer.

That freedom makes investing in non-traditional assets like real estate, livestock, and precious metals easier, but there’s more to SDIRAs than just straightforward investment opportunities. With an SDIRA, you can put your funds to work and earn interest as a private lender.

Using a self-directed IRA to loan money can yield strong returns, allowing you to maximize the funds in your account, but there are a few things to keep in mind. 

Can I Use an SDIRA to Loan Money?

Yes, you can absolutely use your SDIRA to loan money to others. In fact, it’s one of the only retirement accounts of its kind that enables investors to loan out money straight from their retirement.

The funds in your SDIRA account can be used to originate a variety of secured and unsecured loan types.

  • Personal loans
  • Auto loans
  • Small business loans
  • Start-up business loans
  • Mortgages (commercial and residential)
  • Equipment Financing
  • Debt financing/bridge loans

Regardless of the type of loan you choose, it’s important to note that you, as an individual, are not the lender. Even though you generally have the final say over the terms and conditions of the loan, your SDIRA account is the actual lender. As such, loan payments, including interest, must go directly to your retirement account.

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

Instances When an SDIRA Can’t Loan Money

Since loans from an SDIRA originate from your retirement account and not your personal funds, they are subject to the same Prohibited Transactions as other SDIRA investments.

For example, the IRS prohibits lending money from a retirement account to any disqualified persons, including:

  • IRA owner’s fiduciary
  • Spouse
  • Ancestors (e.g., parents and grandparents)
  • Lineal descendants (e.g., children, spouses of children, and grandchildren)
  • Spouse of a lineal descendant

If you’re considering a loan opportunity but aren’t sure if you can use your SDIRA funds, it’s wise to contact your SDIRA custodian or a financial advisor who can help you determine eligibility.

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

Private lending with a self-directed IRA offers many benefits for investors, though they do require a bit of due diligence.

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.

Difference Between a Secured and Unsecured Loan

Personal and business loans typically fall into one of two categories: secure and unsecured.

It’s important to distinguish between secured and unsecured loans when tailoring your investment strategy.

Secured loans are loans that are backed by collateral. If the borrower fails to repay the loan, you can take possession of the collateral item per your loan agreement. Mortgages, auto loans, and business loans are commonly secured, typically with the property being financed.

For instance, if you extend a loan to an individual who is purchasing a home – i.e., a mortgage – you could take possession of their home if they fail to repay their loan. Similarly, equipment, commercial real estate, or even business inventory can secure a business finance loan.

As the name suggests, unsecured loans are not backed by collateral. Therefore, if the borrower fails to make payment following the loan agreement, they won’t have to turn over an asset. As a result, you can potentially lose the original funds and the interest you would have earned. Because of the increased risk, lenders typically apply higher interest rates to unsecured loans.

Before deciding what type of loan is best for you, it’s important to perform due diligence and determine the risks associated with the transaction. This can include credit and background checks, a review of a business plan or past performance metrics (if commercial), and the purpose of the loan. 

Private Lending vs. Hard Money Lending

Another investment option you can decide on is whether to try your hand at 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.

On the other hand, 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.

Once you decide whether you are more comfortable using secured, unsecured, or hard money loans, you can follow our tips below to optimize your investing strategy.

5 Tips for Using an SDIRA to Loan Money

1. Set Up Terms and Conditions and Generate Documents

As the lender, you get to determine the terms of the loan agreement, including the loan amount, repayment period, payment schedule, origination fees, and interest. You can also stipulate a fee schedule for late or missed payments, the type of collateral (if secured), and any other feature you feel is important and valid.

Base your terms on what you know about the borrower. If you can, secure physical collateral to protect against any default. It’s also a good idea to seek out an attorney to look over your documents before submitting them to avoid any legal loopholes or missteps. Your forms should be ironclad. You can submit your documents to your IRA custodian when you’re completely satisfied with your documents.

As your borrower begins to repay the loan, the payments should be sent directly to your SDIRA. Be sure to have someone to service the loan and track the payments. As the account holder, you are responsible for keeping up with every transaction and ensuring the money flows into your self-directed fund.

2. Selecting a Borrower

As previously stated, IRS regulations state that you cannot lend money to yourself or anyone considered a disqualified person. These individuals include spouses, children, parents, and anyone involved with your finances.

Before you proceed, conduct proper research to find the full list of off-limits borrowers. Then, it’s about selecting the best candidate. Questions to ask yourself are:  What are you interested in investing in? What is the borrower looking to do with his or her borrowed cash?

During the selection process, be sure you pick someone you can trust to pay back the loan; be careful of the relationship you have. Should things not work out accordingly and your borrower defaults on the loan, the relationship could become strained.

Perform your due diligence by researching who and what you are investing in. Consider credit scores, payment history, and the venture. As you sum up the situation, you can set up terms that both you and the borrower can agree on.

3. Buying Existing Notes

If you want to use your SDIRA funds in a lending capacity, your options aren’t limited to new loans. For example, if you want to avoid some of the legwork associated with a new loan, you can purchase existing loans, known as “notes” or “promissory notes.”

Promissory notes, which may be available at a discounted rate, are documents that outline a borrowed “promise” to pay. When you purchase one, you become the loan owner and will receive payments per the loan terms.

Like other loans, promissory notes can be unsecured or secured and are available in multiple forms, including mortgages.

4.  Selling Real Estate from Your IRA

Another way to leverage loans as an investment strategy is selling real estate purchased by your IRA. In this case, you can put your real estate on the market privately or with a real estate agent familiar with SDIRA real estate sales. Once you have a buyer and complete the sale, you become the mortgage lender and maintain the promissory note.

Work closely with your custodian if you’re considering selling real estate from your IRA. They can ensure all the proper paperwork is made available and, where applicable, signed and submitted.

5. Fund a Business or Startup

Investing in a business, either well-established or in the start-up stage, is another way to leverage the power of lending to maintain a consistent flow of money into your SDIRA. Businesses can use loan funds for several purposes, including inventory or equipment purchasing, payroll, start-up costs, or simply an influx of capital to meet varied needs.

As with any loan funded through your SDIRA, it’s important to do due diligence and ensure that the business you’re funding can return the funds to the best of its ability. It’s also important to follow IRS guidance on any disqualified transactions or persons to ensure that your investment meets federal requirements.

Using self-directed IRA money to lend to an individual or business entity can be a great way to diversify your portfolio with an asset that offers a consistent influx of money. To make the most of your investment and to limit risk, always carry out due diligence and seek guidance from your custodian or a financial advisor who is well-versed in SDIRA investment.

Are you thinking about adding a lending-based asset to your portfolio? Contact Horizon Trust today. We can help you open your SDIRA and ensure that you meet the requirements attached to SDIRA lending.


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 age 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.