Self Directed IRAs empower investors to take control of their retirement savings and invest in alternative assets such as real estate, private lending, precious metals, LLCs, and more beyond stocks and bonds. But with that flexibility comes a set of important IRS rules to follow.
In this guide, we’ll break down how Self Directed IRA loan rules work, what lending and borrowing look like inside an SDIRA, and how to avoid prohibited transactions that could jeopardize your tax-advantaged status.
A Self Directed IRA (SDIRA) is an individual retirement account that allows full investment flexibility across a wide range of assets, including real estate, private equity, promissory notes, and private lending, all while retaining the tax advantages of traditional or Roth IRAs. Wikipedia
Unlike conventional IRAs (which typically limit you to stocks, bonds, and mutual funds), SDIRAs put you in the driver’s seat of your retirement strategy.
Yes. Your SDIRA can lend money to third parties — but only if it’s structured properly and remains compliant with IRS rules. Accuplan
Here’s how it works:
This structure essentially allows your IRA to act like a private lender, earning interest tax-deferred (Traditional) or potentially tax-free (Roth).
A Self Directed IRA loan is simply a loan issued by your IRA to an external borrower. Unlike a personal loan, the transaction must happen entirely within the IRA, and the funds stay sheltered under the retirement account’s tax rules.
You choose:
This allows you to generate predictable interest income inside the tax-advantaged plan, much like a bank, but with more control.
If your SDIRA lends to or benefits any disqualified person, it’s considered a prohibited transaction, which can trigger the loss of tax advantages and immediate distribution of the account. Accuplan
You cannot borrow personally from your IRA, and there is no way to take a personal loan from your retirement account.
However, your IRA itself can borrow money to help purchase an asset, but only through a non-recourse loan.
A non-recourse loan is a loan where the lender’s only claim, in the event of default, is on the investment itself, not your personal assets.
For example: if your SDIRA buys a property using leverage, the bank’s recourse in case of default is limited to the property, not your personal bank accounts.
Non-recourse lending is the only allowed financing method for SDIRA purchases because it keeps the investment fully within the retirement account’s legal boundaries.
If your SDIRA uses debt to finance a property purchase or investment, a portion of the income may be subject to UBIT — unrelated business income tax. Accuplan
Here’s how it works:
Understanding UBIT helps you plan your investments wisely — because while your SDIRA income is usually tax-advantaged, UBIT can create a tax obligation if leveraged debt is involved.
Open and fund your account through contributions, transfers, or rollovers.
Decide on the terms (interest rate, schedule, collateral) and ensure they’re documented.
Instruct your custodian to issue the loan on behalf of your SDIRA.
Payments must go directly into your SDIRA and never to you personally.
Keep detailed records and stay aware of prohibited persons and UBIT implications.
Investing through loans, whether real estate notes or private lending, can deliver predictable, income-driven returns inside a self directed retirement account. Because the IRA earns the interest, every dollar earned grows tax-advantaged, bringing potential retirement growth.
Remember loan investments:
Self Directed IRAs are powerful because you choose where your retirement dollars work! Whether that’s real estate, private lending, precious metals, or other alternatives, you can let your SDIRA be one of your main retirement income vehicles.
But smart investing begins with understanding the rules, especially when it comes to loans and compliance.
Want help building a compliant SDIRA strategy that fits your financial vision? Contact Preferred Trust Company’s SDIRA experts today to explore how your retirement could benefit from alternative investing.