Just as retirement investments aren’t confined to Wall Street, individuals and businesses aren’t restricted to banks when looking for financing. Your self-directed IRA, 401(k), or HSA can take advantage of this by “being the bank” and lending money to borrowers of your choosing.
Ready to make money on loans with your tax-advantaged dollars? Click here to open a new account today!
Lending Money With Your Retirement Plan
A loan from your tax-advantaged plan is no different than any other loan. Your account provides money to a borrower who makes principal and interest payments according to the negotiated terms. Furthermore, although your self-directed account is technically the “lender,” as the account owner you pull the strings. You qualify borrowers and make decisions on interest rates, duration, security interest, and other terms.
There are some restrictions to keep in mind. Account-owned notes must represent genuine economic transactions, so “sweetheart” loans are prohibited. Also, IRS disqualified person rules apply to promissory notes, so account owners cannot lend to themselves, spouses, or other related individuals.
Once you’ve found a borrower, determined the conditions of the loan, and assembled the loan documentation, you can easily execute the transaction with New Direction Trust Company by completing the following steps:
- Open a self-directed account, if you have haven’t already.
- Log in to your Client Portal.
- Click “Invest” on the left side of the screen.
- Choose the “Private Lending” dropdown menu, and click “Invest Now.”
- From there you will be prompted to complete our Promissory Note Buy Direction Letter. This form represents your authorization to NDTCO to make the investment on behalf of your account.
- Once you’ve completed and submitted the Buy Direction Letter, you can upload the loan documentation to your client portal by sending us a new message with the relevant information and documents.
Specifications for Your Loan Documentation
Your loan documentation must be titled in the name of your account and reflect the account as the “lender,” not you as the investor. Additionally, you cannot sign your personal name on the signature line. An authorized signer from NDTCO, acting as an agent of your account, will sign instead. To affirm that you approve of the transaction, you will write “Read and Approved” in the margins of each page (or otherwise away from the signature line) and sign there.
Upon receipt of all necessary paperwork, NDTCO will send the funds to your borrower and your investment will be underway.
Secured or Unsecured?
As with many other loans, you can secure your account-owned loan with collateral if negotiated between the parties. Upload any applicable security documents along with your Buy Direction Letter and loan documentation through the client portal.
Keep in mind that not all forms of collateral can be retained by your IRA, 401(k), or HSA. For instance, if your IRA-owned loan was secured by property whose value derives from collectability, the IRA could not hold the property as an asset if the borrower defaults, as collectibles are not permissible in tax-advantaged plans. Contact us for more information about these situations.
How Does my Account Get Paid?
Congratulations! Your account is officially a lender, and it’s ready to begin collecting payments. When it comes time for your borrower to make a payment, he or she can visit the Client Portal and click the “Pay Now” button at the bottom of the login screen. From there, your borrower will select “Note Payment” from the Transaction Type dropdown menu and provide the relevant banking information.
At NDTCO, we pride ourselves on making it easy not only for you to manage your account online but for your borrowers to quickly submit payments.
Don’t hesitate to give us a call at 877-742-1270 or send us a message through your Client Portal if you have any questions about lending money with your tax-advantaged account.