Investing with your IRA

There are other ways to earn this money

So you’re ready to invest, and you’ve identified the loan or fund you want to invest in. Great! There is nothing wrong with investing in loans with your cash or your business; however, remember that you will be taxed on this income! There are other ways to earn this money!

Enter ERISA accounts. If you are not familiar with the term, ERISA stands for Employee Retirement Income Security Act. These are 401k plans, defined benefit plans and other retirement accounts that you and/or your employer set up.

If you invest in non-conventional loans with these accounts, you will earn the interest from the loan you invested in either tax deferred or tax free, depending on your account!

How do you do this?

First you open a self-directed retirement account. Check out the sponsors at and I am sure you will find a self-directed IRA company you can do business with there. This usually takes a few days, so it is a good idea to open an account even if you do not have a loan picked out right now.

Next, fund your retirement account. Again, it could take a few days to fund the retirement account. Alternatively, if you vest your non-conventional loan in the IRA account’s name, you have funded it. Check with your IRA custodian to ensure this is compliance.

Third, select the note you want to purchase and send the documents to the IRA custodian. They will want to review the note and put their stamp on ensuring that the note is compliant with retirement laws (note, they do not check with compliance for lending laws). The custodian will then provide you an agreement that authorizes the custodian to fund this note. See above.

Fourth, close the transaction. If you are doing the transaction on the Non-Conventional Lending Exchange, we recommend you use its escrow holder of choice. Otherwise, you and the seller of the note can mutally agree on an escrow and title company. Consult an attorney for legal advice on the loan.

Fifth, send copies of all the loan documents to the Custodian. The IRA custodian is technically the legal entity who owns the note, so they will need to retain the note as well as the loan documents. Send them the originals and you maintain a copy of the note!

Finally, coordinate with a loan servicer to collect your payments. Most investors who use their IRA will hire a servicer to service the loan. Again, check out for servicers.

EMERGENCY: BREAK GLASS! Watch out for the following:

Prohibited Transactions withNon-Conventional Lending& IRAs

When using an IRA to invest in non-conventional loans, you must avoid conducting a prohibited transaction.  This type of transaction is any improper use of your retirement account by you, your beneficiary, or any disqualified person.  Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).  It however does NOT include your brother, sister or anyone horizontal to you.

The following are examples of prohibited transactions with a traditional IRA:

  1. Borrowing money from it.
  2. Receiving unreasonable compensation for managing it.
  3. Using it as security for a loan.

Basically, you need to conduct business with unrelated third parties. Don’t make a loan to a stranger and then hire your spouse to service the loan. Be very careful. Prohibited transactions are not always obvious. Consult a CPA, an attorney or your custodian well versed in these types of transactions before you experiment on your own.

If the IRS determines you have conducted a prohibited transaction, your entire IRA may be disqualified and subject to substantial penalties, fines and taxes.

Unrelated Business Taxable Income (UBTI)

UBTI is generally defined as the gross income derived from any unrelated trade or business regularly carried out by an exempt organization.  The tax on the unrelated business taxable income is called Unrelated Business Income Tax (UBIT).

Most people believe UBTI is not permitted within an IRA.  It is permitted. You just have to be aware of it, and make sure your tax accountant files the appropriate form (IRS 990 T form: see for the form and its instructions).  If you are investing in a partnership that is purchasing real estate or mortgage notes, be especially careful that you know exactly how the partnership is planning to use leverage, if at all.  The partnership’s use of leverage, if not properly documented and treated, could create unintended UBTI potentially subjecting it to significant fines and penalties.

In the note business, UBTI can come into play if you foreclose on a home and inherit an existing lien.   Let’s assume your IRA lends a 2nd mortgage for $50,000 and the 1st is $100,000.   If the investor foreclosed, the investor would inherit $100,000 of debt and could be subject to UBTI.

There are many complicated rules surrounding leverage and the use of retirement accounts.   Be aware of the leverage and the impact to your IRA and consult professionals to guide you to make prudent business decisions.