Your IRA as the Bank: A Plain-English Guide to SDIRA Private Lending

Most retirement investors have never considered the possibility that their IRA could act as a lender. But for self-directed IRA holders, it is one of the most straightforward applications of the account: your IRA loans money to a borrower, earns interest on that loan, and the interest flows back into the account — growing tax-deferred or, in a Roth, potentially tax-free.

Private lending through an SDIRA has attracted renewed attention in recent years as interest rates remained elevated and demand for alternative financing sources increased. Here is how the structure works, what rules govern it, and what every investor should evaluate before funding a private note.

How SDIRA Private Lending Works

When your self-directed IRA acts as a private lender, the mechanics are straightforward. Your IRA — not you personally — is the lender of record. The IRA issues funds directly to the borrower. The borrower signs a promissory note with the IRA named as the lender. Repayments of principal and interest are made directly to your IRA custodian and deposited into the account.

All documentation must reflect the IRA as the lender. If you are John Smith and your custodian is Example Trust Company, the note would typically be titled: Example Trust Company FBO John Smith IRA #123456. Improper titling — using your personal name — can create compliance problems and potentially trigger a prohibited transaction.

What Types of Loans Can an SDIRA Make?

Self-directed IRAs have significant flexibility in the types of loans they can originate:

• Real estate-backed mortgage notes — the most common structure, secured by residential or commercial property through a deed of trust or mortgage
• Secured promissory notes — loans backed by equipment, business assets, or other tangible collateral
• Bridge and construction loans — short-term financing for real estate acquisitions or renovation projects
• Unsecured promissory notes — loans made without collateral, carrying higher risk and typically higher interest rates
• Business loans — financing for operating businesses, subject to additional UBIT considerations

The Tax Advantage

Interest income earned by a traditional self-directed IRA is generally not subject to current taxation — it grows tax-deferred until distributions are taken in retirement. In a Roth SDIRA, interest income accumulates tax-free, and qualified distributions may be entirely tax-free.

Critically, mortgage note income held inside an IRA generally does not trigger Unrelated Business Income Tax (UBIT) because the IRA is acting as the lender, not the borrower. This distinguishes private lending from leveraged real estate investments, where UBIT can apply to the debt-financed portion of income.

The Prohibited Transaction Line

Private lending through an SDIRA is subject to the same prohibited transaction rules that govern all SDIRA investments. Your IRA cannot lend money to disqualified persons — including you, your spouse, your parents, your children, or entities those parties control at 50% or more.

A loan from your IRA to your daughter's business is a prohibited transaction. A loan from your IRA to an unrelated third-party real estate investor is generally permissible, provided all payments flow directly back to the IRA.

Your brother, sister, cousin, or business colleague, however, are generally not disqualified persons under IRC Section 4975(e)(2) — though any loan to a related party still warrants careful review with qualified counsel.

What to Evaluate Before Funding a Private Note

The IRA custodian is not responsible for vetting your loans. That due diligence obligation falls entirely on you as the investor. Before funding any private note through your SDIRA:

• Evaluate the borrower's creditworthiness, track record, and financial position
• Confirm the value of any collateral through an independent appraisal or broker price opinion
• Ensure the promissory note and any security agreement (deed of trust, mortgage, UCC-1 filing) are properly drafted and executed
• Verify that all documentation titles the IRA — not you personally — as the lender
• Establish a clear plan for payment servicing and default remedies

Many SDIRA investors work with a loan servicer for longer-term notes to track payments and handle remittance to the custodian. For shorter bridge loans, direct payment instructions to the borrower are common — the borrower is instructed to remit payments directly to the custodian with the account number included.

This article is for educational purposes only and does not constitute tax, legal, or investment advice. Consult a qualified tax professional or attorney before structuring any self-directed IRA transaction.