Private Lending With a Self-Directed IRA
Your IRA can be a lender. You make the loan, the borrower pays interest, and that interest returns to your retirement account rather than to your pocket, where it compounds without being taxed as it arrives.
The mechanics are simpler than real estate. There is no property to maintain, no tenant, no roof. For a lot of people who are tired of being a landlord, that is the entire appeal.
What follows is how the loan actually gets documented, who handles collections when a borrower goes quiet, and an honest read on when this needs a checkbook structure and when it does not.
Start with when you do not need checkbook control
One loan does not need it.
If you are lending $50,000 and getting $60,000 back in a single payment twelve months later, that is two transactions across a year. Your IRA never needs cash access in between. A custodian directed self directed IRA handles it fine, costs less to establish, and paying to set up an entity for it is solving a problem you do not have. We say that on calls and we will say it here.
Where the arithmetic turns is when lending stops being a single transaction and becomes an activity.
Several notes running at once. Payments arriving monthly rather than once. An extension to paper, a workout to negotiate, a payoff to process. A new deal that needs funding this week because the borrower found a property and you are competing against someone with cash.
At that point every one of those movements is a form, a review, and a wait under a custodian directed structure. That is when checkbook control stops being a convenience and starts being the thing that lets you operate. The full comparison is here if you have not made that decision yet.
The rest of this assumes lending as an ongoing activity rather than a one time loan.
How the loan actually gets papered
There is no standard answer, and the honest version is that it varies by borrower and by how experienced the lender is.
Many of our clients already have promissory note language they reuse. If you have lent money before, you have a document that worked, and the next loan is a matter of changing the names and the numbers. Others use their attorney, particularly on larger loans or where the security instrument is more involved.
Whichever route, the titling rule does not move. The lender is the entity your IRA owns, not you. The note names the IRA LLC or the IRA Trust. So does the deed of trust or mortgage, the assignment, and any subsequent modification. Your personal name does not appear anywhere on the paper, because you are not the lender. Your retirement account is.
That matters more than it sounds. A note made out to you personally, funded with IRA money, is a problem that is far easier to avoid than to unwind.
Payments come back to the entity's bank account. Not to your personal checking account, not even briefly, not even if you plan to move it over the same day.
Nobody is coming to service the loan
This is the part that surprises people and it is worth being blunt about.
You can hire a loan servicer. Most of our clients do not, because it is a cost they would rather avoid on a small portfolio, so the borrower simply pays the IRA owned entity, LLC or trust, directly.
Which means you are the servicing department. You track what is owed. You notice when a payment does not arrive. And when a borrower goes quiet, you are the one making the calls, sending the notices, and deciding how far to push.
Nobody else is going to do it. The custodian holds the account and reports to the IRS. They are not chasing your borrower. There is no back office behind this, and if you were imagining one, better to find out now.
For most private lenders that is fine. It is a phone call and an email, and borrowers who pay on time are the majority. But it is real work, and anyone deciding whether lending fits them should decide it knowing that.
Secure the loan
Related, and the reason the point above is survivable.
Almost all of the lending we see is secured, usually against real property, with the entity your IRA owns recorded as the lienholder. The logic is not complicated. If a borrower stops paying and there is nothing behind the loan, your recourse is to sue an individual who has already demonstrated they cannot or will not pay.
With collateral, there is something to recover. Without it, you are relying entirely on the borrower's willingness, which is the thing that has already failed.
An unsecured loan from an IRA is permitted. It is just a different risk than most people think they are taking.
The rule that decides whether your loan is allowed
Lending has the same constraint as everything else in a self directed IRA, and it has nothing to do with the loan terms.
Your IRA cannot lend to a disqualified person: you, your spouse, your parents or grandparents, your children or grandchildren, or their spouses. It also cannot lend to a business any of them own or control.
That is the rule people most want to bend, because lending to family feels different from buying a house from them. It is not. Lending your IRA money to your son to buy a house is a prohibited transaction whether the interest rate is generous, market, or punitive.
Notice again who is not on the list. Siblings, cousins, nieces, nephews, friends and most business partners are all permitted borrowers. The rule runs up and down your direct family line, not sideways.
Notes you buy rather than originate
Not all of it is lending you start yourself. Some investors buy notes other people originated: whole notes, partials on larger notes, or seller financed notes created when a property changed hands.
The mechanics are the same. Your IRA owned entity is the purchaser, the assignment is recorded in the entity's name, and payments flow into the entity's account. What changes is the diligence, because you are inheriting somebody else's underwriting and payment history rather than setting your own terms.
What the custodian still needs from you
Checkbook control does not remove the annual obligation. Your custodian has to report what your IRA holds, which for a lending portfolio means telling them what your notes are worth.
A performing note is straightforward. One that is late, in workout, or has been modified is not, and that is exactly when the request will feel inconvenient. Keep the signed note, the security instrument, proof of every wire out and payment in, and any extension or modification agreement in one place from the start. Reconstructing it later is the miserable version of this job.
The custodian charges for the account regardless of structure, typically around $50 to open and about $300 a year.
Whether this fits
Two questions decide it: how many loans do you expect to have running at once, and are any of them time sensitive?
One passive note, no deadlines, and you likely do not need a checkbook structure. Several notes, monthly payments, and deals that fund on short notice, and you do.
Most setups run two to four weeks from first conversation to funded, and the variable is almost always how fast your current custodian releases the money. Which means the same advice applies here as everywhere else: start before you find the deal.
We have set up 400+ of these over 13+ years, and part of the job is telling people when they do not need one.
If you are still working out what a self directed IRA can hold, start with what can a self-directed IRA invest in. For the structure itself, see how a checkbook IRA LLC works.
Ted Erickson is the founder of MyDirect IRA. He has spent 13+ years in the self-directed retirement account industry and has established 400+ checkbook IRA structures for clients in all 50 states. He is a licensed California real estate salesperson and mortgage loan originator.
This information is for educational purposes only and should not be considered tax, legal, or investment advice. Consult your own tax or legal advisor before making any investment or plan-structure decisions.
