How-To Become a Mortgage Lender With IRA or 401k Savings

Most investors aren’t aware that the IRS allows an IRA and other qualified plans to make loans without penalty. In fact, the tax benefits associated are also maintained for additional savings opportunities. IRA lending gives you the ability to loan retirement savings to non-disqualified individuals and entities while the IRA receives principle and interest payments just like a bank. As the IRA holder, you get to control all the loan variables such as borrower, loan amount, interest rate, term length, payment frequency, and collateral for security. Let’s take a closer look at the rules, benefits, and logistics so you can begin lending yourself.

Benefits

1. Lending can be a way to diversify or act as an alternative to the stock market.

2. You maintain strategic control over all loans.

3. Your rate of return is predetermined in the note.

4. Loan income provides your retirement account with steady cash flow.

5. You can be a first position lien holder when you lend and foreclose on a property if the borrower decides not to pay.

6. Your loan earnings grow tax-deferred.

Important Considerations

• Your IRA loan must be of real economic value to the plan.
• Your IRA is its own legal entity and separate from your own personal finances.
• The IRA is the lender, not the IRA holder. All loan income goes straight back to the IRA.
• The IRA cannot lend to Disqualified Persons which include: you, your direct lineal family members and their spouses (IE. Spouse, Parents, Children, Son’s wife). **Note: Brothers, sisters, and other non-lineal family members are okay.
• Your IRA provider must allow private loans as an investment option. Most brokerage companies will not allow these types of alternative investments.
• Have your attorney review all loan documents to ensure your contracts are valid.
• Do your diligence and crunch your numbers. Is the investment inline with your risk tolerance and return expectations?

Step-By-Step Guide – How to Make Loans from an IRA

Step 1: Open and fund an IRA with a provider that administrates IRA loans. Move funds from existing retirement plans into your new IRA. This can be done via Transfer, Rollover, or new contribution. You can combine account balances if necessary or move partial amounts.

Step 2: Find a Borrower and come to an agreement on terms. You provide the borrower with terms and decide if the note will be secured or unsecured.

Step 3: Generate your loan documents and instruct your IRA provider to issue the investment.

Step 4: Watch your IRA statements to verify that borrower(s) are making payments according to the terms of the loan.

This blog is intended to provide a high-level overview and lacks certain details that everyone must know before getting started. I welcome questions and future content requests! Thanks for reading.