Private Lender Private Lending with a Self-Directed IRA

/Private Lender Private Lending with a Self-Directed IRA

Private Lending with a Self-Directed IRA

By |2018-09-26T02:24:31+00:00September 26th, 2018|IRA Approach, Private Lender|0 Comments

Answers to your common questions.

Do you originate private loans but harbor other goals for your long-term financial security? Is your retirement account enduring the ebb and flow of the stock market, without a clear indication of where it’s heading next? You may be able to address both concerns by bringing your proven private lending strategy to a self-directed individual retirement account (IRA).

Maybe you have a stockbroker who doesn’t want to lose commissions when you shift your retirement accounts to alternative assets. Or, maybe you were simply unaware of your full spectrum of options. In either case, alternative investment options have been allowed in retirement plans for a long time.

Some investors may be well-versed in their business but may not think it’s feasible to translate their day-to-day income strategies into a retirement plan. That’s not the case. Many of the false assumptions surrounding self-directed investing have been undone by service and education-based IRA providers who have created a framework for success.

Knowledge is power when it comes to IRA investing. Stocks, mutual funds and exchange-traded funds (ETFs) can seem relatively straightforward, but the engines that drive their price movements can be difficult to interpret. Conversely, alternative assets may seem complicated, but you get to be the driving force behind your profits. That’s where private lenders can enjoy a distinct advantage. You’ve already mastered the private lending practice; you just need to know how to put that knowledge to work for your long-term financial vision.

Let’s discuss some common questions you may have about private lending with a self-directed IRA.

How Does it work? 

‘You can add private notes to your self-directed retirement strategy through a simple three-step process:

Open a Self-Directed IRA.

Plenty of financial institutions administer retirement plans, but few allow their clients to utilize alternative assets like real estate, private equity or private loans. As such, you’ll want to research IRA providers that specialize in these investments and establish a new self-directed account with the one that suits your needs.

Fund Your New IRA.

To consolidate funds from your other retirement accounts, you may:   Contact your new IRA provider to initiate a transfer (a movement of funds between like account types, such as traditional IRA to traditional IRA). Contact your current plan administrator to initiate a rollover (a movement of funds between dissimilar account types with the same tax statuses, such as a pre-tax 401(k) to a traditional IRA). Make a contribution (deposit) of your personal funds.

Issue the Loan.

Once your account is funded, you may coordinate with your IRA provider and your borrowers to originate private loans with your retirement dollars.

How Involved Will I Be in the Lending Process? 

The beauty of self-directed investing lies in your ability to stay involved in whatever capacity you deem necessary. You’re under no obligation to hire third-party servicers for your IRA-owned note. You may still qualify your potential borrowers, agree on all applicable terms (durations, interest rates, etc.) and prepare the loan documentation as if you were lending your non-IRA money.

Once your IRA money has been issued to fulfill the loan, all subsequent payments received from the borrower must be forwarded to your IRA provider for proper deposit into your account. It will be important to maintain separation between your retirement money and your nonretirement money.

Can I Issue Secured Loans with My IRA? 

Yes, an IRA-owned note can be secured with collateral, just like any other. If your borrower defaults on the loan, whatever he or she offered as security will become the tangible property of your account. In these instances, it may be helpful to know that collectibles are on the short list of assets that you may not hold in a self-directed retirement plan. You may accept a collectible as collateral for a loan that your IRA owns, but the asset would have to be liquidated so that your IRA could receive cash. Other allowable property like real estate could be held in kind, if you so choose.

Precious metals somewhat walk the line between IRA-eligible and collectible, but physical coins and bullion are allowed, in most cases. If the items in question meet purity requirements set forth by the IRS (Gold = 99.5%, Silver = 99.9%, Platinum and Palladium = 99.95%), your IRA may accept them as collateral and receive them without liquidation. Gold American Eagle coins do not meet the 99.5 percent requirement, but they’re allowed in retirement plans through a special IRS exception. Older coins with high collectible value or other items that fail to meet their respective purity minimums would have to be sold before deposit into your IRA.

Will the Documentation Be the Same? 

Loan documentation—as well as any supplemental security documentation—for an IRA-owned note will largely resemble that of a non-IRA transaction, except that the titling and signatures must reflect ownership by your account and not by you personally.

Wherever you would provide your name, you would instead provide the “name” of your IRA. For example, if your name is Jane Doe and your Roth IRA is originating the loan, you would print the following name in any requested locations: “Example IRA Provider, Inc. FBO [for benefit of] Jane Doe Roth IRA #1xxxx.”

You will not provide your personal signature in locations you otherwise would. An authorized representative from your IRA provider, as the entity that maintains custody over your IRA, will sign in your place.

To communicate your approval of the investment, you will write “Read and Approved” in the margins of every page and provide your signatures next to each inscription.

Apart from these titling considerations, any documents inherent to the IRA loan origination process should remain consistent with any others you may encounter in the private lending industry.

Can I Lend to Anyone I Want? 

For the most part, your self-directed IRA may issue loans to anyone of your choosing; however, the IRS has made several key exceptions:

You, as the account holder, may not derive direct financial benefit from or provide direct financial benefit to the assets held in your self-directed account. Equally disqualified persons include your spouse, lineal members of your family tree (parents, children, grandparents, grandchildren, etc.) and their spouses. Non-lineal family members like cousins, siblings, aunts or uncles, as well as non-disqualified friends and business partners, are all able to conduct business with your IRA. Fiduciaries to your account (such as your IRA provider) may not interact with your account apart from carrying out their designated roles and duties.

Issuing a loan of your IRA funds to any disqualified person is regarded as a prohibited transaction by the IRS and may result in the forcible distribution of the asset or your entire account, either of which may result in taxes or penalties.

Keep in mind that your IRA can do business with other IRAs and that one’s qualified status will reflect on his or her account. In other words, your IRA could not engage in a lending or credit relationship with your spouse’s IRA, as your spouse is a disqualified person. Everything else is fair game. For instance, if your friend needs money to finance a real estate investment with his or her self-directed retirement plan, your IRA can loan money to its tax-advantaged counterpart on a non-recourse basis (meaning the IRA-owned property—and not the personal cash or assets of your friend—would be available as collateral on the note).

How Do Distributions/Withdrawals Work? 

Although retirement plans are designed to remain intact for the long haul, you’re certainly able to withdraw emergency funds in a pinch. You’ll need to contact your IRA provider to request a distribution and await receipt of the funds. Depending on the provider, that shouldn’t take longer than a day or two if you request a wire or ACH. You could even request an in-kind distribution of an IRA-owned note, in which case the current fair market value of the asset (which would be the remaining due balance on the loan) would be reported as income. You could then begin collecting payments on the remaining balance as if you originated the transaction with non-IRA funds.

Distributions may carry tax or penalty consequences, depending on your age and your account type. For example, if you’re age 59 ½ or older, your Roth IRA has been open for at least five years (the clock starts on the date of your first contribution) and your IRA-owned notes have produced positive cash returns, you may withdraw those earnings tax- and penalty-free at any time and for any reason. On the other hand, distributions from a traditional IRA will be taxed as income. If you’re under age 59 ½, an additional 10 percent penalty on the distribution value will apply as well. Consult with your IRA provider for a complete understanding of your account and the possible ramifications of premature distributions. You may also want to speak with an accountant or tax attorney, as the IRS may waive early distribution penalties under special circumstances (like making a down payment on your first home).

A contingent of account holders will have to begin taking withdrawals once they reach a certain age. Regular income from loan payments can bring relative ease to this process. Pre-tax account holders (traditional IRA, SEP IRA, SIMPLE IRA, etc.) who reach age 70 ½ must initiate annual required minimum distributions in accordance with their prior year’s account values and their ages. Steady cash flow can help maintain a pool of money from which such account holders can easily draw when the time comes.

By |2018-09-26T02:24:31+00:00September 26th, 2018|IRA Approach, Private Lender|0 Comments

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