The Fine Print: Can You Lend Money to Yourself from Your Self-Directed IRA?

Written By: Daniel Gleich

Key Points 

• Though you can’t directly lend yourself money from your Self-Directed IRA (SDIRA), if in a pinch, you can choose to employ a 60-day rollover.
• If you’re the owner of a Self-Directed Roth IRA, you may be eligible for qualified distributions.
• Through the SDIRA vehicle, you’re fully capable of behaving as a bank and lending money to third party borrowers.
• If you’re seeking a loan for your SDIRA, it must be a non-recourse loan as this prevents you from personally guaranteeing the loan.

Self-Directed IRAs (SDIRAs) are retirement accounts that allow owners to invest in alternative assets that align with their interests. Through a SDIRA, asset classes such as real estate and precious metals like gold are available. When prospective investors hear the term ‘self-directing’ they may presume they have complete and utter access to their funds. While in some respects this is true, the IRS does not permit account holders to directly benefit from their SDIRA in current times. 

As this tool is geared towards your retirement, the main purpose of a SDIRA is to help aid in a potentially prosperous period once you no longer earn active income. Any evidence indicating that you’re not using it in its designed fashion may render your SDIRA subject to taxes. Lending yourself money from your Self-Directed IRA is purely barred. Let’s look at the different lending rules when it comes to Self-Directed IRAs: 

Self-Directed IRA Prohibited Transactions and Its Rudiments

Let’s first review prohibited transactions that could occur within a Self-Directed IRA. First and foremost, you are not allowed to directly sell or lend money to yourself from your SDIRA. As an extension, so is every single one of your affiliated entities. (Self-Directed IRA LLCs, Self-Directed IRA Trusts, and corporations are some cases).

Furthermore, you cannot have any person that would be considered a disqualified person reap financial benefits from your account. Your Self-Directed IRA must not participate with your ascendants or descendants, your spouse, or your spouse’s ascendants, descendants, or business(es). These entities and individuals harbor too close a relationship and can convince the IRS that you are profiting for your benefit now. Despite this, your siblings, aunts, uncles, nieces, and nephews, can be involved in your SDIRA transactions, as their relation is deemed distant enough. 

It's worth noting that these same prohibited transactions are also attached to Self-Directed Checkbook IRAs. Though you have the freedom and flexibility to perform everyday transactions without the involvement of your custodian, checkbook control does not garner admission for personal gain in the present day. 

Navigating the Gaps

Circumstances may occur where the need for instant funds are critical – with retirement money developing in your tax-advantaged account, it may seem simpler to lend money to yourself from your SDIRA and replace it later. Regardless of IRS regulations, it is indeed possible. One approach is to implement the 60-day rollover rule.  

The 60-day rollover was generally established for investors hoping to roll over funds from one retirement plan to another. It allows account owners to extract funds without any tax implications so long as the funds are returned within 60 days from date of removal. SDIRA holders can also use this when in straitened conditions.  

For example, if the payment date for your child’s tuition is fast approaching but your paycheck isn’t arriving for another week, you can take the needed money to pay the bill and replace it as soon as you receive your check. It’s important to confirm the same amount of funds are restored within this time frame. Failure to do so may render your retraction as a distribution and it would be subject to income tax. If you’re under the age of 59 ½, you may acquire a 10% withdrawal penalty in addition to taxes. 

If you’re considering completing a 60-day rollover, it’s important to speak to your financial advisor, CPA, or another professional to help determine if this strategy is right for you. 

The Resourceful & Reliant Self-Directed Roth IRA

When you choose to open a Self-Directed Roth IRA, your funds accumulate tax-free. This is because you’re opting to pay all taxes up-front, at the point of creation. By following specific guidelines, you can choose to take withdrawals from your Self-Directed Roth IRA without triggering any tax liability. This is what’s referred to as qualified distributions. 

Fundamentally, a Self-Directed Roth IRA needs to be in existence for five years in order to be eligible for qualified distributions. The five-year mark begins the day of your first contribution. The following essential factor: the account owner is 59 ½ years old and above. If you fall into this group, qualified distributions may be an ideal way to loan yourself money from your SDIRA. 

SDIRAs and Lending Liberties

Perhaps you’re wondering – if I can’t lend to myself, could I possibly lend to an outside party with my SDIRA? This is entirely feasible, and one of the most popular avenues to achieve this is through promissory notes. This alternative asset is a type of private lending that stands as a written agreement and legal contract accompanying a loan and is accessible for investing with a Self-Directed IRA. 

On a promissory note, you can find the sum borrowed, due date of the loan, interest rates, repayment schedule, collateral, and any other term relevant to the arrangement. Since you’ll be behaving like a private bank, all terms and conditions will be concocted by you and your borrower. Investing in promissory notes will not only further diversify your retirement portfolio but can potentially help hedge against inflation. 

A significant advantage to lending money from your SDIRA is reveling in a generally appreciated return on investment (ROI). An exceptional ROI is dependent on several factors, including the total amount borrowed, interest rate, and length of loan. The longer the borrower needs to repay their loan and the higher the interest rate, the more cash you can accrue. Subsequently, you can be providing a loan to an individual or entity who would otherwise not be eligible for a loan elsewhere. 

Securing Loans Within a Self-Directed IRA

Situations may arise where you’re interested in purchasing a particular investment – like real estate - with your Self-Directed IRA but lack the necessary funds. In this predicament, you may decide your choice of action should be applying for a loan for your SDIRA. For retirement accounts, not all loans are created equal. 

It’s imperative that the loan you apply for is a non-recourse loan. This loan is IRS-compliant and steers its signers away from potential prohibited transactions. A non-recourse loan cements that your SDIRA is liable if the loan gets defaulted on. This protects you, as now the lender cannot go after any other IRA assets or you as an individual. 

Cross Your T’s and Dot Your I’s

SDIRAs were generally structured to support you during your retirement. While there are a few ways in the Self-Directed IRA sphere for present day aid, we strongly encourage you to familiarize yourself with IRS codes and prohibited transactions. Prior to facilitating any transactions, it’s considered best practice to speak with your financial advisor regarding the possible outcomes. 

Starting to Think About the Future?

There’s no time like the present to plan for your retirement. Self-directed investing is an advantageous and personalized way to save. Place a discovery call today to learn how opening a SDIRA could help prepare you for a potentially prosperous retirement.