What to Know Before Investing in Private Lending with a Self-Directed IRA

Private lending is one of those investment ideas that sounds almost too straightforward to be true. You lend money. You earn interest. The borrower repays. But when you do it through a Self-Directed IRA, that simple idea can turn into a powerful way to grow retirement wealth…if you understand how it works and what to watch for. So, let’s demystify what private lending in a Self-Directed IRA looks like, how it might work for you, and how you can use it as a way to build reliable wealth in your retirement plans.

How Private Lending Works in a Self-Directed IRA

When you invest in private lending through a Self-Directed IRA, your retirement account becomes the lender. You’re not lending money personally. Instead, your IRA funds the loan, earns the interest, and receives the payments. That means all profits stay inside your IRA and grow tax-deferred (or tax-free if it’s a Roth account).

This setup lets you act more like a bank than an investor. You decide who to lend to. You determine which terms make sense and what collateral to require. That could mean helping a real estate investor fund a renovation or providing short-term financing for a small business. The key is that every decision, from the loan amount to the repayment schedule, flows through your IRA—not your personal account.

And that’s what makes private lending in a Self-Directed IRA so appealing. It combines control, predictable income potential, and the satisfaction of putting your money to work in something real.

Staying Within the Rules of a Self-Directed IRA

Even though you have more freedom with a Self-Directed IRA, there are still retirement rules you have to follow. The borrower can’t be you, your spouse, or certain close family members. You also can’t lend to a business you or those same family members own. The IRS calls these “disqualified persons,” and avoiding those transactions keeps your account compliant.

All income and repayments have to flow directly into the IRA. You can’t deposit a payment into your checking account and move it later. The same goes for expenses related to the loan—those must be paid by the IRA itself. It’s easy to stay on track once you understand the boundaries, but it’s important to be precise.

Before funding a loan, many investors work with a Self-Directed IRA administrator like American IRA to make sure everything is documented correctly. That includes drafting the note, recording the lien if it’s secured by property, and keeping clear records of all transactions. Once the process is in motion, the account essentially runs itself.

Why Investors Like Private Lending

Private lending can offer something many retirement investors are looking for: consistency. Instead of waiting for dividends or hoping for capital gains, you can earn steady interest payments at a rate you agree on upfront. That kind of predictability can make retirement planning feel more grounded.

There’s also the potential for diversification. When you add private notes to a portfolio that already includes real estate or traditional assets, you’re spreading risk across different income sources. Even if one area slows down, your loan payments may continue right on schedule.

Of course, every investment comes with some level of risk. Borrowers can default, for example. Markets can shift, and other things can happen, like collateral losing value. But for investors who understand lending or want more control over their returns? A Self-Directed IRA opens doors that traditional accounts simply don’t.

Interested in learning more about Self-Directed IRAs?  Contact us at 866-7500-IRA (472) for a free consultation or download our free guide.