Self-Directed Private Lending IRA

Interest income that lands inside the IRA grows without an annual tax bill. Inside a Traditional IRA, interest is tax-deferred and is taxed only when you take distributions in retirement. Inside a Roth IRA, qualified distributions come out tax-free. The shelter compounds the advantage over time, especially on longer-horizon notes. Want the basics first? See how self-directed IRAs work.

Anyone at arm's length. The IRA cannot lend to a disqualified person under IRS prohibited-transaction rules. That rules out you, your spouse, your lineal ancestors and descendants and their spouses, plus any business those people control 50% or more of. Siblings, cousins, aunts, uncles, friends, and unrelated business partners are not disqualified and are eligible borrowers. The rules are complex. Talk to a tax advisor before doing any deal that involves someone you know. Read more on disqualified persons.

Under IRS rules on IRA disqualification, the IRS treats the entire IRA as distributed on January 1 of the year the violation happened. The full balance becomes taxable income that year, plus a 10% additional tax on the distributed amount if you are under 59½. Other disqualified parties to the deal face a 15% penalty tax that climbs to 100% if the transaction is not corrected within the correction window. If you think a line may have been crossed, contact a tax advisor immediately. More on prohibited transactions.

On a secured note, the IRA forecloses on the pledged collateral to recover principal. Recovery depends on the property's value, your lien position, and foreclosure costs. Use a licensed servicer or an attorney for collections and foreclosure. On an unsecured note, the IRA has no asset to seize and may have to sue the borrower or accept a partial loss. Pricing and underwriting up front is the only real protection on unsecured paper.

Generally no. Passive interest income inside an IRA is not subject to Unrelated Business Income Tax (UBIT). Two exceptions to know. First, if your IRA borrows money to fund the loan, the leveraged portion of interest becomes taxable as Unrelated Debt-Financed Income (UDFI). Second, if the IRA is making loans frequently and at scale, the IRS can treat that as an active money-lending business, which can trigger UBIT on the income. More on UBIT and UDFI.

Take a hands-off role. Personally collecting payments, chasing late notices, or running a foreclosure counts as providing services to the IRA. The IRS treats that as a prohibited transaction. Use a licensed loan servicer or an attorney for collections and any default proceedings.

Every loan payment must be remitted directly to the IRA, not to you. Tell the borrower or escrow agent to wire payments directly to the account. If a payment lands in your personal bank account, the IRS treats the amount as a distribution, with taxes and a 10% additional tax if you are under 59½.

You are responsible for furnishing an annual fair market value for the note. Accuplan collects the valuation and the year-end balance is reported to the IRS on Form 5498. For a performing note, the value is typically the unpaid principal balance.

Yes, for Traditional IRAs. Required minimum distributions begin at age 73, rising to 75 in 2033 under SECURE 2.0. Notes do not have a market price the way stocks do, so plan ahead. You may need to keep cash in the account, take an in-kind distribution of part of the note, or sell the note at a discount to meet the RMD. Roth IRAs have no RMDs for the original owner. IRS, RMD FAQs.

Trust deed investing is one slice of private lending. A trust deed loan is secured by real estate, with a neutral third-party trustee holding the deed. Private lending covers a broader set of structures: secured notes against other collateral, unsecured notes, residential and commercial mortgages, equity participation loans, and performing or nonperforming note purchases. The same disqualified-person and tax rules apply across all of them.