A self-directed IRA opens the door to a variety of alternative investment possibilities to build retirement wealth. One strategy growing in popularity involves private lending investments an IRA. Successful transactions can potentially generate a healthy, tax-sheltered return in your retirement account, something we all seek and deserve.
Private lending as an investment in an IRA is classified as an alternative asset to the traditional stock, bond, or mutual fund. Other alternatives include real estate, private equity, crowdfunding, hedge funds, and much more.
Private loans are unique in that you can choose to extend funds to a stranger or a trusted friend. But, as with any investment, private lending is not without risk. For every credit-worthy borrower, there are unworthy borrowers, too. Protect yourself and your self-directed IRA by performing due diligence that can increase your chance of success.
How Private Lending Investments Work in an IRA
Many individuals and businesses are unable to secure conventional financing for one reason or another. Perhaps they simply prefer to seek private lending for their financing needs. For the IRA owner, private loans offer a great way to diversify retirement portfolios.
Essentially, your IRA becomes the bank. As the owner of the account, you have great flexibility and control in defining the terms.
IRA account owners:
- Choose and vet the borrower
- Determine the loan amount and term length
- Decide the interest rate
- Extend secured or unsecured loans
Secured loans are backed by collateral like real estate or a car. Your IRA earns income on the interest of the loan. In case of default, the IRA takes ownership of the collateral to sell and recoup the loan balance (and in some cases, more).
Unsecured loans are not backed by collateral and present greater risk in case of default. These transactions typically carry higher interest rates to minimize any loss as a result of non-payment of the loan.
Private lending investments are popular among savvy individuals who understand how to use retirement funds to invest in alternative assets. And, there are plenty of private lending and other options available as discussed in this article published by REIClub.
Successful Private Lending Investments Benefit the IRA and the Borrower
- IRA owner earn tax-sheltered income for retirement
- Borrowers receive capital without the hassle of conventional lending institution requirements
Choose a reputable and experienced self-directed plan administrator
Self-directed retirement plan administrators play a crucial role in serving these accounts. Midland IRA is a trusted resource for our clients who hold over $2 billion in assets. We do not give investing or financial advice. But, we ensure the administrative aspects of your investments comply with IRS standards. We file reports on your behalf and provide statements for your review, and help you follow prohibited transaction guidelines.
For more information on self-directed retirement plans and the benefits of private lending investments, contact Midland today.