Third party loan to an IRA?
Hello, this is my first post here, I appreciate all the great tips and insight offered on this forum.
My question is this: is there anything that prevents a self-directed IRA from borrowing from a third party who is not a “disqualified person”? If this were allowed, this would help offset the disadvantage of the low annual contribution limits.
For example, suppose I find out about a terrific investment opportunity (not real estate). I open a Roth IRA with 5K, the IRA borrows 50K from a third party (perhaps a friend of mine), makes the investment with 55K in funds, and then repays the loan a couple of years later with reasonable interest after the investment has grown considerably.
The loan would be unsecured, so in the very unlikely even the investment didn’t pan out, the lender would just take a loss. If necessary I could hire an attorney to draw up a promissory note between the IRA and the lender.
I can’t find anything on the subject of an IRA borrowing except for IRAs borrowing on a nonrecourse basis to buy real estate.
Thanks in advance for any insight.
Permalink Submitted by Alan - IRA critic on Tue, 2018-04-10 18:38
You can buy other investments with an IRA loan but need to find a self directed IRA custodian that supports this activity and can help you avoid prohibited transactions which would result in your IRA being distributed and subject to tax and penalty. These firms are experts and handle alternate IRA investments on a daily basis, so that is where to go to get your questions answered. Note that the custodian must report the general type of investment to the IRS on Form 5498 annually, so this could result in more IRS scrutiny. What you want to do is similar to buying stocks on margin, except that you cannot use margin in an IRA or in any manner use your IRA as security for a loan.