Your IRA as the Bank: Private Lending Rates and Rules in 2026

The Basic Structure: Your IRA Is the Lender

In a self-directed IRA private lending arrangement, the retirement account itself — not the account owner personally — acts as the lender. The IRA provides the capital, receives the interest payments, and holds the promissory note as an asset on its books. The borrower makes payments directly to the IRA custodian, which credits them to the account. The account owner identifies the opportunity and directs the investment; the custodian executes and holds.

That distinction is not a formality. It defines the entire compliance framework for private lending inside a retirement account. Departing from it — by naming the account owner personally as lender, by having payments delivered to the account owner rather than the custodian, or by having the account owner personally guarantee the IRA's loan — can create prohibited transactions with severe tax consequences.

What IRA Private Lenders Are Earning

Private lending rates inside self-directed IRAs are driven by the same factors that govern any private lending market: loan position, collateral type, borrower quality, and loan-to-value ratio. In 2026, first-position mortgage notes — where the IRA holds a first lien against real property — have generally produced gross interest rates in the range of 8 to 12 percent, depending on property type, borrower profile, and LTV. First-position loans carry the lowest risk among private lending structures because the IRA lender has priority over all other creditors in a foreclosure.

Second-position mortgage notes, which are subordinate to a first lien, have commanded 10 to 15 percent or higher to compensate for that additional risk. In a foreclosure proceeding, the first lien is satisfied before the second lender receives anything — meaning second-position lending requires commensurately higher returns and more conservative underwriting to be appropriate.

Unsecured promissory notes carry the highest default risk and are generally deployed in short-term situations with known, creditworthy borrowers at rates that compensate for the absence of collateral. Business-purpose loans — secured by equipment, receivables, or business assets — represent a separate category where underwriting focuses on business cash flow as much as collateral value.

All interest income flows into the IRA — not to the account owner — and compounds tax-deferred in a Traditional SDIRA or potentially tax-free in a Roth SDIRA. That tax wrapper is the defining advantage of lending through the retirement account rather than personally.

The Compliance Framework: Critical Rules for Every Deal

The prohibited transaction rules of Internal Revenue Code Section 4975 govern every private lending transaction inside a self-directed IRA. The most fundamental rule: an IRA cannot lend to a disqualified person. Disqualified persons include the account owner, the account owner's spouse, parents, grandparents, children, grandchildren, their spouses, and any entity in which those individuals collectively own more than 50 percent. The IRS does not distinguish between intentional and unintentional violations.

Several other compliance requirements apply to every IRA private lending transaction:

• Titling: All loan documents — the promissory note, any deed of trust or mortgage, any UCC filing — must name the IRA (typically formatted as "[Custodian Name] FBO [Owner Name] IRA [Account Number]") as the lender, not the account owner personally. A document naming the account owner personally on a loan funded by IRA capital creates a prohibited transaction regardless of the intent behind it.
• No Personal Guarantee: The account owner cannot personally guarantee an IRA loan. In Peek v. Commissioner, the Tax Court held that IRA owners who personally guaranteed notes issued by their IRAs had engaged in a prohibited extension of credit from a disqualified person to the IRA. That ruling applies regardless of how the guarantee is structured or documented.
• No Co-Lending: The IRA owner cannot personally co-lend on the same note as the IRA. If a deal requires more capital than the IRA has available, the IRA may participate as a fractional lender alongside other investors — but each participant's involvement must be separately documented and proportional, with no personal obligation from the IRA owner tied to the IRA's portion.
• All Repayments to the IRA: Every payment — principal, interest, fees — must flow directly to the IRA account. The account owner cannot receive any payment, even temporarily, without risk of prohibited transaction treatment.

Due Diligence: The Account Owner's Responsibility

The IRA custodian administers the account but does not evaluate investment quality, assess borrower creditworthiness, recommend deals, or advise on structure. All of that is the account owner's responsibility. The IRS makes clear: the compliance obligation rests with the investor, and the custodian's role is limited to processing directions and providing required reporting.

For real estate-secured lending, experienced SDIRA lenders generally target a maximum loan-to-value ratio of 65 to 70 percent of the property's current market value — providing a buffer against foreclosure costs and potential market softening. An independent appraisal, rather than a borrower-provided valuation, is standard practice for any material loan amount. Borrower analysis should cover repayment capacity, credit history, and track record on comparable transactions.

Loan terms — interest rate, maturity, amortization or interest-only structure, prepayment provisions, and default remedies — should be documented in a professionally prepared promissory note executed in the name of the IRA. For real estate-secured loans, a recorded deed of trust or mortgage provides the IRA's collateral position in any subsequent default and foreclosure proceeding.

The Tax Efficiency of IRA Private Lending

Private lending returns inside an IRA are not taxed at the time the interest is received. In a Traditional SDIRA, the interest income compounds tax-deferred until distributions are taken in retirement. In a Roth SDIRA, the income accumulates and can be distributed entirely free of federal income tax if the account owner meets the applicable IRS requirements. For investors generating consistent interest income from a portfolio of notes, the difference between paying income tax annually on interest earned in a taxable account versus deferring or eliminating that tax inside an IRA can be substantial over a multi-decade holding period.

One important note: private lending income generally does not trigger Unrelated Business Income Tax inside the IRA, because interest income is specifically excluded from the definition of unrelated business taxable income under IRC Section 512(b). That exclusion applies to note interest flowing into the IRA from qualified lending arrangements — another structural advantage of IRA private lending compared with active business investments inside a retirement account.

Private lending inside a self-directed IRA involves the risk of borrower default and loss of principal. This article is educational and does not constitute investment, legal, or tax advice. Investors should consult qualified professionals before directing IRA assets into any private lending transaction.