By: Brianna Avillo
Key Points
- Self-Directed IRAs (SDIRAs) can be utilized for private lending, but there are certain rules about who you can lend to.
- It’s crucial SDIRA owners are conscientious of prohibited transactions. A vital one is ensuring your retirement account does not engage with any disqualified persons.
- For disqualified family members, consider making them a beneficiary to your account or opening a Self-Directed Custodial Roth IRA to better your child’s retirement.

Perhaps you’ve considered offering Self-Directed IRA loans to your family. As a retirement account holder, providing a sense of reprieve to loved ones can be inviting. Though Self-Directed IRAs (SDIRAs) can be used for private lending, having certain family members as recipients can lead to indiscretion. Let’s take a deeper dive:
Self-Directed IRA Loans to Family Members: Prohibited Transactions
The IRS explicitly forbids lending money from a SDIRA to specific family members. Doing so would violate IRS rules and equate to a per se prohibited transaction. A per se prohibited transaction occurs when your Self-Directed IRA participates in any transaction with a disqualified person. This includes selling, buying, lending money, extending credit, or providing any other form of goods and services to a disqualified person.
Relative disqualified persons comprise of:
- You and Your Spouse
- Your Parents and Stepparents
- Your Spouse’s Parents and Stepparents
- Your Ancestors
- Your Descendants (Children, Grandchildren, Adopted Children)
- The Spouses of Your Children and Grandchildren

In addition, your Self-Directed IRA cannot perform transactions with any closely held corporations, LLCs, partnerships, or other entities where you or a disqualified person owns 50% or more. These impediments were created with reason. Partaking in these actions can appear self-dealing, which is not permitted with retirement accounts. It contradicts the purpose of retirement savings, which is designated for your future – not the present day.
Despite this notion, some selected individuals made the approved list for Self-Directed IRA loans to family members. They consist of:
- You and Your Spouse’s Siblings
- Your Siblings-in-Law
- Your Nieces and Nephews
- Your Spouse’s Nieces and Nephews
- Your Aunts, Uncles, and Cousins
- Your Spouse’s Aunts, Uncles, and Cousins
While these blood relatives are not the conventional next of kin, being able to offer help during a time of financial hardship to someone you care for can provide solace.
Don’t Go Against the Grain

If an SDIRA holder were to lend a Self-Directed IRA loan to disqualified family members, they could possibly face penalties.
Should this happen, the SDIRA owner’s entire IRA can lose its tax-exempt status as of January 1 of the year the prohibited transaction occurred. This results in all the money in their account being relinquished, thereby becoming subject to income tax. If they’re under the age of 59 ½, they'll congruently be met with a 10% early withdrawal fee, and this will be 10% of the entire amount in their IRA. If the IRS feels inclined, they could also impose a 15% additional excise tax on the amount involved in the prohibited transaction.
Acquiring their retirement savings as standard income can also place the SDIRA owner in a higher tax bracket. This can cause potential complications when it comes time to file their annual tax returns.
Exploring Alternatives
If you want to help a disqualified family member financially, there are a few alternative options to consider outside of your Self-Directed IRA. For instance, you can cosign on a standard loan or gift them money from a non-retirement fund source. (Gift money may be subject to gift tax rules). You may wonder if you could withdraw money out of your Self-Directed IRA and use the distributed funds as cash to hand off to relatives. Wouldn’t this technically let your Self-Directed IRA loan to family?
While the factual answer is yes, this process is immensely complicated. To start, if you’re under the age of 59 ½, you’ll typically face a 10% early withdrawal penalty in conjunction to paying income taxes on the distribution (if you have a traditional SDIRA). While Self-Directed Traditional IRAs mandate account holders to take required minimum distributions (RMDs) at age 73 in 2024, it’s strongly encouraged that what you do with these distributions follows your retirement plan. Moreover, depending on your Self-Directed IRA custodian, you may have fees associated with taking distributions.

Possible Exceptions for Self-Directed IRA Loans to Family Members
If you still feel circumstances are dire enough for potential withdrawal, there are a few exceptions that allow you to avert the 10% early withdrawal penalty. These omissions are as follows:
- You’ve become disabled
- You’ve acquired substantial medical expenses
- You have qualified educational expenses
- You’re purchasing your first home
You may also want to get a consensus on the value of the investments linked to your Self-Directed IRA. As SDIRAs allow owners to undertake alternative investing, certain assets such as real estate or private company shares may be illiquid in comparison to other investments. Regardless of your conditions, it’s considered best practice to consult with a financial advisor prior to making impulsive or significant withdrawals.

Give the Gift of Retirement
While you may not be able to implement your Self-Directed IRA for a family loan, you can choose to enroll them as beneficiaries of your SDIRA. Your beneficiary can either be an elected individual or entity who will inherit authority over your retirement account in the event of your passing. This coincides with the general intent of Self-Directed IRAs: aiding in the enrichment of a possibly secure retirement.
You can also set your child up for potential retirement riches. Our youth generally has more time on their side – combine this with the saving benefits embedded in the Self-Directed Custodial Roth IRA and your child can obtain robust retirement savings. When the moment arrives to retrieve funds from their account, they likely won’t have to pay any income tax. Furthermore, this can better help children get equipped with financial literacy and develop positive saving/spending habits.

With a Self-Directed Custodial Roth IRA, both your child and other family members will be able to contribute to this account, so long as they do not exceed the annual contribution limits. Opening this type of account for your child is arguably one of the greatest gifts, as it gives their retirement a possibly thriving outlook.
Self-Directed IRA Loans to Family Members Lending Substitutes
The urge to employ your retirement savings towards lending has a benevolent quality. You can consider using your SDIRA funds to loan to non-disqualified individuals or businesses, personal loans to third-party recipients, or real estate loans. In alignment with per se prohibited transactions and self-dealing prohibited transactions, it’s typically paramount to verify that these real estate loans will not be for personal use or for the use of a disqualified person.
One common approach for giving a loan through your Self-Directed IRA is via promissory notes. Promissory notes are a type of private lending that stands as a written agreement and legal contract accompanying a loan. In said agreement, all the details will be regaled: the sum borrowed, due date of the loan, repayment schedule, collateral, interest rates, as well as any other applicable terms and conditions.
Promissory notes generally contain recompenses. They tend to be a low-maintenance investment, and their returns are usually predictable and steady. This is in part to the loan terms being discussed and agreed upon prior to your lending. Since you’ll have a framework of the terms to reference, it can also grant you peace of mind.
One of the resounding benefits of Self-Directed IRAs is its tax advantages. As the account holder, you’ll get to decide whether your earnings will develop tax-deferred (Self-Directed Traditional IRA), or your gains will grow tax-free (Self-Directed Roth IRA). This type of investment is typically uncorrelated to Wall Street products, so the value of your loan will remain intact. Subsequently, this alternative asset will likely contribute to a diversified retirement portfolio, paving the road for a potential prosperous retirement.

Reaffirming the Importance of Retirement Preparation
If you’re looking to give Self-Directed IRA loans to family members, it may be prohibited depending on their relation. While your siblings, aunts, uncles, and cousins can retrieve a private loan from your SDIRA, other lineal descendants will have to seek funds through other channels. Although you can’t assist their present-day fiscal needs, you can set them up so that they’re taken care of in the future. You can’t predict anyone’s retirement, but the devotion and safeguarding you instill today could lead to an easier journey for your loved ones.
Eager to Lend?
Are you interested in using your retirement funds to pool capital into a promising investment, or to possibly lend money to a venture with potential? Our Self-Directed IRA Specialists can guide you through the process. Schedule a free discovery call today to learn more!