Transactional Lending for Quick Profits in Your IRA
A little known but potentially quite profitable lending niche is referred to as transactional funding. For investors with a Checkbook IRA or Solo 401(k) and the right network, this strategy can be very lucrative.
The concept of transactional funding is very well suited to a self-directed retirement plan and can be a good alternative for wholesaling or flipping, both of which are not really optimal for retirement funds.
What is Transactional Funding?
Simply put, transactional funding is the cash necessary for wholesalers and flippers to execute the quick acquisition and resale of a property. This is a commonly used creative real estate funding strategy.
Many wholesale or non-rehab flip transactions require a double-closing transaction and cannot simply be assigned. Examples would be foreclosures or short sales, where the controlling entity such as a bank or auction trustee requires a named purchaser to acquire the property and pay off any outstanding debt.
As a transactional lender, your self-directed IRA or Solo 401(k) is providing the cash to the wholesaler or flipper to purchase the property from the original seller, with the arrangement to resell the property to a qualified buyer in a short period of time.
Double-closings can often be done same day. Sometimes there may be a short delay such as a week or two between closings.
Income Potential
Because transactions are often very short term, most transactional loans charge a flat fee based on the amount borrowed in a range from 2% – 12%, depending on amount, risk factors, and expected time frame. For a $100,000 loan and a same day close, that might mean between $2,000 and $12,000 in return for one day. That is a pretty good rate of return.
Of course, with such short-term lending, it is challenging to keep money actively deployed. For every loan executed, you will likely have many days of idle capital between loans. That will reduce your overall rate of return.
If you plan to do transactional lending, you will want to develop a network of borrowers so you can fund deals with reasonable frequency.
Checkbook Control is a Must
Waiting 3-5 days for an IRA custodian to review and process an investment is simply not an option in the transactional lending space. Lenders need to be able to react quickly to opportunity and provide funds promptly.
A Checkbook IRA or Solo 401(k) is required to engage in this type of lending with retirement funds.
The key benefit of checkbook control is the ability to execute contracts and fund transactions on-demand, without 3rd party paperwork, processing delays, or per-transaction fees.
Finding Deals
Success in transaction lending comes from three things: network, network, and network. In order to keep your IRA money actively deployed you need to have multiple investors who flip or wholesale properties in your network that can look to you for rapid funding of their deals.
Being involved in local real estate clubs or meetups is one way to create connections with potential borrowers. If you have good relations with a handful of title agents or attorneys, they will often know who is active in these types of deals and looking for funding.
Direct Lending or Brokered Deals
If you can work directly with borrowers, you can have more control over who you work with, underwriting deals, and the terms of your loans. This equates to the maximum amount of control and investment return, but also requires a lot of work to develop relationships, ensure your lending documents are fully compliant with state laws, vet potential transactions, etc.
There are companies that broker transactional funding. For some IRA or 401(k) investors, it may be worth giving up a few percentage points of interest to be able to rely on seasoned professionals to put money to work.
Diligence Considerations
With transactional lending, the property itself is the only security for the loan. Often times, your loan is covering the full cost of the purchase transaction. As such, you want to be sure the property is worth what is being paid.
Secondarily, you need to be sure the initial purchaser has lined up a buyer with appropriate funding to execute the secondary purchase. Not all lenders are willing to fund the 2nd half of a double-close transaction, so ensuring the final buyer’s funding is appropriate is a key factor to success.
If the final buyer fails to execute, you want to be sure your initial borrower has the ability to find another buyer for the property, or that your IRA is OK with taking over ownership of the property.
In many ways, thinking like a title agent is critical to good underwriting of transaction funding loans.
A Better Fit for an IRA
Many investors approach us with the idea of using a self-directed IRA to wholesale or flip properties. For a variety of reasons, neither of those approaches is well suited to an IRA.
Wholesaling requires a lot of hustle. The level of effort required to generate deals for your IRA could easily be viewed by the IRS as providing services to your IRA, which is a prohibited transaction.
Both wholesaling and flipping are considered dealer activities, or in IRA speak, trade or business activities. When an IRA engages in a trade or business on a regular or repeated basis, it is deemed to be competing with tax-paying enterprises and becomes subject to taxation on Unrelated Business Taxable Income (UBTI). The tax impact erodes profit margins to the point where such transactions are not typically beneficial in an IRA or 401(k) plan.
Transactional lending produces passive interest income, which is fully sheltered to a self-directed retirement plan.
While you would pay regular income tax rates on such loans personally, your IRA can collect interest on these short terms loans in an entirely tax-sheltered manner.
Short Term Minimizes Risk
Let’s face it. With COVID-19 ravaging the country, the short-term economic outlook is wildly variable and the mid-term and long-term are pure crystal ball territory. Who knows what will happen to demand for real estate in the next few months or years?
The beauty of transactional funding is that your IRA money is in and out of a deal in very short order. This minimizes the downside risk of potential drops in real estate values, extended vacancies, or tenants who are unable to pay rent that may come with other types of real estate investing in these uncertain times.
In Summary
Short-term transactional lending can be very profitable and has minimal exposure to long-term risk factors that may impact various other investment classes in the age of Coronavirus.
Because such transactions require rapid decision making and funding, a self-directed IRA with checkbook control is a must.
The speed at which this space operates also requires that you really do your homework in advance. Engage title, lending, and legal professionals to help you craft a strategy with the highest likelihood of success.
Networking is key to creating transactional lending opportunities. You need to learn who in your community has the expertise to pull off wholesale transactions effectively, and make sure they can rely on you for on-demand funding when needed.
If the work required to develop relationships with borrowers and review opportunities is beyond your skills or available time bandwidth, working with a professional lender who brokers transactional funding opportunities might be a good choice.
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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.
