Borrow money with your IRA

Most of the time, the first stop for a person or business wanting to borrow money is a bank or other lending institution. But, what about those individuals who, for one reason or another, cannot borrow from any of these institutions? Some might say that these people are too high a risk to lend to. I’ll leave that to you, the investor, but I’ll do it nonetheless; introduce you to the other end of the spectrum.

There are actually a couple of reasons why you might consider lending money with your IRA. First, the terms may be whatever you and the borrower agree to. That said, since borrowers are often unable to obtain adequate financing elsewhere, interest rates tend to be much higher than those offered by other institutions. Being in the IRA business, I can say that double-digit interest rates are not uncommon. This can be a win-win situation for both the lender and the borrower. The borrower gets the loan they couldn’t otherwise get, and the lender sits back and accepts the well-above-average returns they negotiated.

Below (and this is probably the answer to the question on your mind) are ways to significantly reduce the risk involved. A common way to reduce the risk involved in lending money with your IRA is to secure the loan with physical property, such as real estate or other property. Once secured, the best-case scenario for the lender may occur when the borrower defaults and the lender has to foreclose on the property.

Now, instead of receiving the anticipated interest payments, the lender’s IRA takes possession of property that is often much more valuable than the expected return. It goes without saying that if you’re considering lending someone money, and the loan needs to be secured, you’d better be comfortable foreclosing on that person’s property if necessary. Of course, you can lend money without securing the loan, but you do so at your own risk!

Now that we’ve briefly discussed the basics, I’ll mention that there are still rules that apply to this type of investment (just like any other investment). First, an IRA cannot lend money to any “disqualified person.” The term disqualified in an IRA is used to refer to the IRA holder’s immediate family (with the exception of siblings) and certain professional associates, such as fiduciaries and employers. If you are wondering whether or not a certain person is a “disqualified person,” feel free to contact our office to discuss it. Another thing you’ll want to check to make sure you stick to the rules is your state’s rules about how high an interest rate you can negotiate. Your best resource for this question would be a competent attorney.

With this, and any type of investment, it is completely necessary to do your own homework and consult the right professionals when necessary. Also, keep in mind that this article is meant to be a starting point only, and if you’re interested in lending money out of your IRA, you need to do more research. If you have any IRA-specific questions, we’d be happy to help.