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When most people think about an IRA, they picture stocks, bonds, mutual funds, or target-date funds. That is what traditional financial institutions are designed to offer, so it is no surprise that most retirement conversations stop there.
What many investors do not realize is that the IRS does not limit IRAs to Wall Street investments. In many cases, the limitations come from the financial institution holding the account, not from the tax code itself.
This is where Self-Directed IRAs come into play.
In this article, we explore how private lending works inside a Self-Directed IRA, what rules apply, and what responsibilities come with having more control over your retirement account.
A Self-Directed IRA is still an IRA. The account structure does not change, and neither do the core tax advantages.
Traditional Self-Directed IRAs grow tax deferred, with taxes generally due when distributions are taken. Roth Self-Directed IRAs offer the potential for tax-free growth if IRS requirements are met.
The difference lies in investment choice.
With a Self-Directed IRA, the account holder can direct the IRA to hold alternative assets beyond stocks and bonds. These may include real estate, promissory notes, private placements, private stock, precious metals, and cryptocurrency.
This article focuses specifically on promissory notes, commonly referred to as private lending.
Private lending through a Self-Directed IRA means that your IRA is the lender in a loan transaction. You are not lending personally. Your retirement account is.
In practice, this typically follows a clear process.
A borrower needs capital. This may be for real estate, business expansion, equipment, bridge financing, or another purpose where traditional financing does not fit.
You identify the opportunity, evaluate the borrower, review the proposed terms, and assess any collateral involved.
If you choose to proceed, you direct your Self-Directed IRA administrator to fund the promissory note from your IRA.
Once funded, your IRA holds the promissory note as an asset. The borrower makes payments according to the agreed schedule, and both principal and interest are paid directly back into your IRA.
This is different from owning shares in a lending company. When your IRA holds promissory notes directly, you control who you lend to and what terms are acceptable.
Private lending inside an IRA is governed by strict IRS rules. These are requirements, not suggestions. Violating them can result in immediate taxation of the entire IRA balance, along with potential penalties.
The prohibited transaction rules exist to prevent self-dealing. An IRA is designed to benefit your future retirement, not provide current personal benefit.
Your Self-Directed IRA cannot lend to disqualified persons, including:
This means your IRA cannot lend to your own business, finance a family member’s project, or make loans that personally benefit you, even if the terms appear fair.
All transactions must also be conducted at arm’s length, meaning fair market terms with no preferential treatment.
Self-Directed IRA administrators handle recordkeeping and transaction processing. They do not evaluate investments, assess borrowers, or recommend deals.
Due diligence is the responsibility of the account holder.
Before directing your IRA to fund a promissory note, it is important to understand the borrower’s ability to repay, the value and condition of any collateral, the market conditions involved, and the options available if the borrower defaults.
These questions should be answered before funding a loan, not after.
Many experienced IRA private lenders work with attorneys, CPAs, and other professionals to help evaluate risk, structure transactions, and ensure compliance.
Every private lending transaction inside an IRA must be properly documented.
This typically includes a promissory note outlining the loan amount, interest rate, payment schedule, maturity date, and terms. Secured loans may also require a mortgage, deed of trust, or UCC-1 financing statement.
All documents must be titled correctly in the name of the IRA, not the individual.
For example, if John Smith is lending through his IRA, the lender would be titled as Mountain West IRA FBO John Smith, IRA account number 123456.
Improper titling can jeopardize the tax-advantaged status of the account, which is why many investors work with professionals experienced in private lending and Self-Directed IRAs.
All loan payments must go directly to the IRA custodian and be deposited into the Self-Directed IRA.
In a Traditional Self-Directed IRA, these funds continue to grow tax deferred until distributions are taken. In a Roth Self-Directed IRA, qualified distributions may be tax free.
The tax treatment is determined by the IRA structure itself, not by the type of asset held.
If a borrower defaults, outcomes depend on whether the loan is secured or unsecured.
With secured loans, the IRA may have rights to the collateral, such as foreclosure for real estate or repossession for other assets. All related costs must be paid from IRA funds.
If the IRA acquires property through foreclosure, the asset remains titled in the IRA. Any income generated goes back into the IRA, and all expenses are paid from IRA funds.
With unsecured loans, recovery options are more limited and depend on legal remedies and the borrower’s remaining assets.
You cannot personally guarantee loans made by your IRA. You cannot use personal funds to rescue a bad loan. You also cannot personally use property or assets acquired by the IRA.
IRA assets must remain separate from personal use at all times.
Real estate lending is one of the most common private lending strategies used inside Self-Directed IRAs, where the property serves as collateral.
Business lending is another option, providing capital for equipment, inventory, or expansion. These loans may be secured or unsecured.
Some investors also participate in peer-to-peer lending platforms that accommodate Self-Directed IRAs.
In every scenario, the IRA must be the lender on all documentation.
Private lending through a Self-Directed IRA may make sense for individuals who understand lending risk, are comfortable evaluating borrowers, and are committed to following IRS rules.
It also requires a willingness to perform due diligence and work with qualified professionals when appropriate.
Mountain West IRA provides Self-Directed IRA administration and education. We help clients establish accounts, process transactions they direct, and understand how Self-Directed IRAs work.
We do not provide investment, tax, or legal advice, and we do not evaluate or recommend specific lending opportunities. Investors should always consult with their CPA, tax professional, attorney, or financial advisor before moving forward.
Private lending through a Self-Directed IRA is one option for diversifying beyond traditional investments. With education, proper documentation, and careful planning, it can be a powerful tool for those seeking more control over their retirement strategy.
Mountain West IRA can help you open a Self-Directed IRA or Solo 401(k), so you can invest in what you know best.
📞 Call us at 866-377-3311 or
This post is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor for personalized advice.
Mountain West IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If accounting, tax, legal, investment, or other similar expert assistance is required, the services of a competent professional should be sought.
Meet with our team to explore your personalized journey of building wealth through investing in real estate, promissory notes, precious metals, and other assets using your retirement fund.
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