How to Lend to Businesses with Your IRA
Having your IRA act as a lender and receive interest income can be a great way to diversify and create predictable returns. We’ve written about investing in real estate notes, where the debt is secured by real property. But your IRA can also lend to businesses.
If your network includes entrepreneurs and businesspersons in need of capital to start or grow a venture, having your Checkbook IRA or Solo 401(k) be the bank can be a good option.
The fact is, a lot of businesses are in situations where obtaining bank financing may be difficult or just too expensive. Self-employed persons with limited business history, or small dollar loans that may not be attractive to a bank are some cases where your IRA can fill a need.
For a lot of investors, the ability to lend locally in opportunities they can personally evaluate is appealing. Business lending can be that type of opportunity.
What is a Small Business Loan?
A business loan is a lending arrangement wherein a lender provides capital to a borrower for the purposes of starting, operating, or expanding a business. The borrower agrees to pay back the loan with interest, and that interest represents the tax-sheltered gain the IRA will receive from the investment.
The lending transaction is documented with a promissory note, which is a contract outlining the terms of the arrangement such as how long the loan repayment will be and the interest rate. The note also conveys the borrowers promise to repay the debt.
Securing the Loan
A loan may or may not be secured by a hard asset such as business inventory or equipment. It’s also possible to secure a loan by financial assets of a business such as accounts receivable.
Sometimes, a borrower will pledge non-business assets as security for a loan to be used for business purposes. This is referred to as cross-collateralization.
Whether the loan is secured or un-secured isn’t critical for IRA compliance reasons, but does factor into the level of risk one is taking on.
When a loan is secured by an asset with value it reduces the risk, as the IRA can take possession of the asset if the borrower defaults. When a loan is unsecured, there is no remedy in the event of a default, and a higher risk of total loss in value.
The interest rate for unsecured loans is typically higher than for secured loans.
Loan Terms
The terms of a loan should be in-line with the needs of the borrower and the level of risk to the lender. Any loan made by an IRA should also be at what would generally be considered market rates.
Loan terms such as the length of the loan, interest rate, loan setup fees and the like are all negotiable. A longer-term loan with a solid underlying security might have a lower interest rate. A shorter-term or higher risk loan may merit a higher interest rate.
IRS Rules Considerations
As with all investment transactions made with a self-directed IRA or 401(k), operating within the IRS rules is critical to protect the tax-sheltered status of your retirement plan.
Your IRA may not lend in a fashion that creates a direct or indirect benefit to a disqualified person. Those disqualified persons include, you, your spouse, and lineal family like parents and children, or entities controlled by a lineal family member.
Lending to your child or your child’s business would be prohibited and forfeit the tax-sheltered status of your IRA. Similarly, lending from your IRA to an associate, who then reciprocates by lending from their IRA to you or your business would be a violation, as you’re indirectly using your IRA to benefit yourself.
You must always invest an IRA with the best interests of the IRA in mind. While it’s permissible to lend to certain family members such as a sibling, you wouldn’t be acting in the best interest of the IRA if you were to make a higher risk business loan at a very low interest rate. Any loan to any allowable party should be done at market rates for similar types of loans.
Lending Rules
From an IRS perspective, you only need to be concerned about avoiding self-dealing or dealings with disqualified persons. However, as a lender, your IRA also needs to operate within state lending laws – often referred to as usury laws.
Work with a local expert or attorney to ensure that the terms of the loan are in line with the law, and that any necessary disclosures are provided.
Any time your plan hires a professional for services such as legal review — with the review being exclusively for the use of the plan — fees for such services should be paid from the plan.
Diligence Considerations
When your IRA or 401(k) is acting as a lender, you are the loan underwriter. This is a great amount of flexibility, but also means you need to do your homework.
Any time you are considering a loan transaction you need to fully evaluate the risk factors to determine the likelihood the loan will be repaid. The factors you will want to consider vary based on the borrower and type of loan, but would include some of the following:
- Who is the actual borrower; an individual, partnership, business entity, etc.?
- What is the security for the loan? What is the real, fair market value of that security?
- Does the borrower have experience in the line of business they are operating?
- Does the business have financials that can be reviewed?
- Can you run a credit check on the borrower, and determine what other debt obligations they may have?
- Can you run a background check on the borrower?
- What happens in the event of a default? How would your IRA take control of and draw value from the security backing the loan?
Lending vs Equity
In many cases, using your IRA to lend to a business can be a better option than having the IRA take an ownership stake in the business. When an IRA owns a portion of an operating business that is not a shareholder corporation issuing dividend income, then the pass-through income of that business will be considered Unrelated Business Taxable Income.
This means the IRA will pay taxes on the business income received. However, a loan receives interest income which is passive in nature, and not considered UBTI. All of the gains will be entirely tax-sheltered to the IRA.
Following this line of thinking, it’s important that any loan to a business be a true loan, and not a way to try and mask business profits in a lending vehicle. The terms of the loan cannot be variable based on the performance of the business. The loan must be for a set interest formula.
It’s possible to provide capital to a business in the form of a note that has the option to convert to equity in the future. This can be advantageous in a venture capital environment, where the purpose of the loan is to facilitate the growth of the business in anticipation of a sale.
Just ahead of that sale, the option to convert the note to ownership can be exercised. Since UBTI only applies to operating income and not to a gain on sale of equity in a business, the IRA can then reap a benefit if the business plan succeeds, without any significant exposure to taxation on UBTI.
Being the Bank Can be a Good Thing
For those investors with the right connections and the ability to analyze lending opportunities, lending to businesses can be a great way to diversify and create consistent, predictable returns.
Business lending is also a type of investment that can provide the personal satisfaction of investing locally and helping the success of others in your community.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
