I get this question all the time: “Can I lend money out of my IRA?” The short answer is yes—but with an asterisk. Lending from your self-directed IRA can be a powerful way to generate passive income, especially in a high-interest environment. But if you don’t follow IRS rules carefully, you could blow up your entire tax-advantaged account.

So let’s break it down. Here’s what I tell people who are thinking about this strategy.

Yes, You Can Lend—But Not to Just Anyone

Lending is a fully legal and common use of a self-directed IRA (SDIRA). In fact, many people use their IRA to make private loans secured by real estate or business assets. These are called “promissory notes” or private money loans. They can deliver solid returns when structured right.

But here’s the big caveat: you can’t lend to disqualified persons. That means:

• Yourself
• Your spouse
• Your parents or grandparents
• Your kids, grandkids, or their spouses
• Any business you or those people own 50% or more of

Even a loan to your business partner can be off-limits if they qualify as disqualified under the IRS rules.

If you violate this rule, your IRA could be disqualified, and you’d owe taxes and penalties on the entire account. That’s not worth the risk.

What a Compliant Loan Looks Like

Let’s say you’ve found a borrower who isn’t disqualified—what now? Here’s how to structure a compliant, smart loan:

1. Fair Market Terms

The loan should have an interest rate and term that makes sense for the current market. Don’t give sweetheart deals. If private lenders are charging 10% on hard money loans, your IRA should do the same.

2. Proper Documentation

Use a promissory note that spells out:

• Loan amount
• Term and payment schedule
• Interest rate
• Late payment penalties

This is not a handshake deal. Use a real loan agreement—and keep it on file.

3. Collateral is a Good Idea

Unsecured loans are allowed but risky. Most savvy IRA lenders use collateral, like real estate, to secure the loan. If the borrower defaults, your IRA can foreclose and recover value.

4. Record-keeping and Payments

Make sure all payments go back to the IRA—not to you personally. You want a paper trail of every dollar.

Common Pitfalls to Avoid

Here’s where people get tripped up:

Lending to “Gray Area” Borrowers

If you lend to your brother-in-law’s startup, and you’re also an advisor to the company, that could trigger a self-dealing violation. Don’t assume someone’s OK just because they’re not a direct family member.

Getting Paid Personally

If a borrower writes a check to you instead of your LLC or Trust, that’s a red flag. Always keep personal and LLC or Trust funds separate.

Where to Find Borrowers

If you’re not sure where to start, some investors use their IRA to fund:

• Real estate rehabbers who need short-term capital
• Small businesses looking for working capital
• Individuals buying tax liens or deeds

Just be cautious. Vet your borrowers thoroughly. It’s your retirement money, not a Vegas bet.

You can also invest through lending platforms or debt funds that accept IRA capital. Here’s a list of IRA-compatible private lending platforms that are gaining popularity among SDIRA users.

A Smarter Way to Lend

If you’re going to lend from your IRA, treat it like a business. That means:

• Do due diligence on every borrower
• Use legal documentation
• Secure your loan when possible
• Keep everything arm’s length and above board

Some investors build entire portfolios around private notes inside their IRA. When done right, it’s a great way to diversify away from the stock market.

Worth Considering

Lending from your IRA isn’t for everyone. But if you understand the rules, do your homework, and keep things compliant, it can be a smart way to put your IRA capital to work—especially in today’s high-interest environment.

And if you’re ever unsure? Check in with a tax advisor who knows the SDIRA landscape. Better safe than taxable.