Can You Rollover a Roth IRA into a Private Lending IRA? Mortgage Note SDIRA Rules
Yes — you can use a self-directed IRA to make private loans secured by real estate (mortgage notes), unsecured promissory notes, tax liens, and other lending instruments. All interest income flows back into the IRA tax-deferred or tax-free. You cannot lend IRA funds to yourself, your spouse, your children, or any other disqualified person.
1What is a Private Lending SDIRA?
Private lending in an IRA encompasses any loan or note investment made by the SDIRA to a borrower — including first and second mortgage notes, deed of trust investments, unsecured promissory notes, construction loans, bridge loans, and tax lien certificates. The IRA acts as the lender; the borrower makes interest and principal payments back to the IRA.
Standard brokerage IRAs cannot hold private mortgage notes or promissory notes — these are non-publicly-traded debt instruments. A self-directed IRA custodian holds the note on behalf of the IRA and facilitates the loan documentation.
Private mortgage notes typically yield 8–12% annually — significantly higher than bond yields available in standard IRA investment menus. All interest income flows into the IRA tax-deferred, compounding without annual tax drag. In a Roth SDIRA, the interest compounds permanently tax-free.
2Roth IRA Rollover Considerations
Roth IRA to Roth Private Lending SDIRA: highest-value structure. Converting interest income (ordinarily the highest-taxed investment income category) to permanent tax-free status maximizes the Roth advantage.
3Prohibited Transactions (IRC 4975)
Lending IRA funds to any disqualified person is a categorical prohibited transaction regardless of interest rate, collateral, or terms. The IRA cannot lend to the account holder to fund their personal real estate purchases, business operations, or any other purpose.
Strictly Prohibited
- Making a mortgage loan from the IRA to yourself to purchase your home
- Lending IRA funds to your adult child to fund a business
- Making a construction loan from the IRA to a company you own
- Lending to a spouse, parent, or grandchild regardless of terms
- Lending to an entity where you or a family member owns 50%+ interest
Legally Permitted
- First mortgage loans to unrelated borrowers secured by real property
- Hard money lending to real estate investors who are not disqualified persons
- Construction loans to unrelated builders
- Tax lien certificates purchased at municipal auction
- Unsecured promissory notes from unrelated businesses
- Seller-financed notes (where the IRA acts as seller and carries the note)
4Rollover Process Mechanics
Open a self-directed IRA with a custodian experienced in note investments (Equity Trust, Directed IRA, Midland IRA)
Fund via direct rollover — cash arrives at the SDIRA
Submit an Investment Direction Letter identifying the borrower, loan amount, interest rate, term, and collateral
The custodian disburses the loan from the IRA and holds the promissory note and deed of trust
Borrower makes payments to the IRA via a third-party servicer or directly to the custodian
All principal and interest payments accumulate inside the SDIRA tax-deferred or tax-free
5Cost & Fee Structure
Setup Cost
$50–$300
Charged initially by the custodian.
Annual Fees
$150–$400/year
Recurring maintenance expense.
Transaction Cost
$100–$250 per loan funding or receipt of payoff
Charged per asset interaction.
6Tax Implications
Distributions from a traditional Private Lending SDIRA are ordinary income. Note: interest income held personally is also ordinary income — so there is no capital gains rate advantage being sacrificed by holding notes in a traditional IRA (unlike gold or crypto, where outside-IRA holding has potential capital gains treatment).
📈 Roth Interaction Advantage
A Roth Private Lending SDIRA converts interest income from taxable ordinary income into permanently tax-free income. For a $200,000 private lending portfolio earning 10% ($20,000/year), the annual tax savings at 22% bracket is $4,400/year — representing $44,000 over 10 years, in addition to the compounding effect.
7Common IRS Pitfalls
Lending IRA funds to a family member — even at market rates and with proper documentation
The prohibited transaction rule is categorical — there is no 'fair market terms' exception for loans to disqualified persons. A properly documented, market-rate mortgage loan from the IRA to the account holder's adult child is just as prohibited as a below-market informal arrangement. The identity of the borrower, not the terms of the loan, determines whether the transaction is prohibited.
Failing to use a third-party loan servicer for payment processing
If borrowers make payments directly to the account holder's personal bank account — even if the account holder promptly transfers them to the SDIRA — the intermediate personal possession may constitute a prohibited transaction or at minimum a reportable distribution. A third-party loan servicer ensures all payments flow directly from borrower to IRA, maintaining the separation required by the prohibited transaction rules.
Not maintaining adequate documentation for each note investment
Every private lending SDIRA investment must be documented with a promissory note identifying the IRA as lender, a deed of trust or mortgage (for real estate-secured loans), title insurance (naming the IRA), and evidence of the custodian's disbursement. Missing or informal documentation creates: (1) difficulty enforcing the note if the borrower defaults; (2) IRS audit risk; (3) complications for estate settlement if the account holder dies with outstanding notes. Treat every note investment with the same documentation rigor as a commercial bank loan.
8Frequently Asked Questions
Can I use my IRA to make private mortgage loans?
Yes — through a self-directed IRA. The IRA acts as the lender; all interest payments flow back into the IRA tax-deferred or tax-free. The key restriction: you cannot lend IRA funds to yourself, your spouse, your children, your parents, or any entity controlled by disqualified persons. All loans must be to unrelated third-party borrowers at arm's length.
What interest rates can I charge on private loans from my IRA?
Your IRA can charge market-rate or above-market interest on private loans. The IRS does not impose a maximum rate. The only restriction is that loans to disqualified persons are prohibited entirely — regardless of rate. Hard money loans from SDIRAs to unrelated real estate investors typically earn 8–12% annually, secured by first-position deeds of trust at 65% LTV or lower.
What happens if a borrower defaults on a loan made from my IRA?
The SDIRA initiates foreclosure or collection proceedings — all at the IRA's expense. All legal costs must be paid from within the SDIRA (you cannot pay them personally without it being an excess contribution). The IRA can acquire the property through foreclosure — at which point it becomes a real estate SDIRA asset subject to all the real estate SDIRA rules (no personal use, no family member occupancy, etc.). Using a third-party loan servicer and maintaining adequate cash reserves inside the SDIRA to cover default-related legal costs is essential.