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You cannot borrow money from your own IRA, but just about any other person or business certainly can. Private lending with a self-directed IRA enables you to utilize the business model you know and trust while harnessing a significant degree of control over your retirement. As with almost any investment approach, there are a number of ways to participate in IRA loans.
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Loan Origination
If you’re accustomed to issuing loans and collecting interest, you can adopt this strategy with your tax-advantaged retirement dollars. You, the account holder, qualify your potential borrowers and make final decisions on interest rates and loan durations. Your IRA then receives the principal and interest payments.
The key benefit of lending money with an IRA is that IRA earnings are tax deferred. An account that holds alternative investments still carries the same tax benefits as those that only hold stocks. As such, you will not have to pay annual income taxes on your earnings. Taxes may only come due upon distribution (withdrawal) from your account.
Fractional Debt
Online platforms offer fractional investments in larger loans. They provide an opportunity for IRA holders to tap the debt market without engaging in full-blown originations. These platforms issue loans to individuals and businesses and then sell portions to other investors, allowing those investors to enjoy a share of the interest. Meanwhile, the platforms replenish their capital pools so they may initiate new transactions.
Equity or Fund Investments
Private equity is another viable avenue for self-directed investors. If you’re inclined to invest in the lending business without putting your money toward debt instruments themselves, you may be able to acquire equity in a lending company with your IRA. You may also purchase shares of an investment fund with your account if a lending company offers such an investment vehicle.
Self-direction empowers you to choose a market segment (or segments) that you understand and follow the course of action that suits your needs. For more information about IRA loans or self-directed investing, please feel free to give us a call at 720-739-7457 or send us a message through the Client Portal.
