Most people's retirement accounts can only buy stocks, bonds, mutual funds, and ETFs. That's not because the IRS limits you to those options. It's because the big brokerages (Fidelity, Schwab, Vanguard) only offer those options. It's what they sell, so it's what you get.
A self-directed IRA removes that restriction. It's still an IRA with all the same tax benefits. But instead of being limited to what's on a brokerage menu, you can invest in real estate, private loans, small businesses, precious metals, and more. For people interested in private lending, this is how you do it inside a retirement account.
What a Self-Directed IRA Actually Is
A self-directed IRA (SDIRA) is an individual retirement account held by a specialized custodian that allows alternative investments. The IRS has always permitted IRAs to invest in a wide range of assets. The only things explicitly prohibited are life insurance, collectibles (art, wine, coins with some exceptions), and S corporation stock.
Everything else, including real estate, private mortgage notes, and private loans, has always been allowed. Most people just don't know this because their brokerage never told them.
The custodian's role is administrative. They hold the account, process transactions, handle required IRS reporting, and make sure the paperwork is in order. They don't give investment advice or approve your deals. You choose what to invest in. They execute the paperwork.
Some popular SDIRA custodians include Equity Trust, IRA Financial, Rocket Dollar, and Alto IRA. Fees and structures vary, so it's worth comparing before you open an account.
How Private Lending Works Inside an SDIRA
Here's the step-by-step process.
First, you open a self-directed IRA with a custodian that allows private lending. Some custodians are set up specifically for this. Others are more general-purpose. Either way, make sure "private notes" or "private lending" is listed as an allowed investment type before you open the account.
Next, you fund the account. You can roll over funds from an existing 401(k) or traditional IRA. You can also transfer from another IRA. If you're setting up a new SDIRA, you can make annual contributions up to the IRS limit ($7,000 in 2026, or $8,000 if you're 50 or older). Most people who use SDIRAs for private lending are rolling over larger sums from existing retirement accounts.
When you find a lending opportunity, you send a "direction of investment" letter to your custodian. This tells them: "Use funds from my SDIRA to make this specific loan." The custodian wires the funds, and all loan documents (the promissory note, the mortgage or deed of trust) are titled in the name of the SDIRA, not your personal name.
Monthly payments from the borrower go back into the SDIRA. If it's a traditional SDIRA, those payments grow tax-deferred. You don't pay income tax on them until you take distributions in retirement. If it's a Roth SDIRA and you've met the 5-year rule and are over 59½, those payments are tax-free. Forever.
That last part is worth sitting with for a second. If you have a Roth SDIRA and you lend $50,000 on a private mortgage note that pays you monthly, every dollar of interest you receive is tax-free income. That's a meaningful advantage over lending with personal (after-tax) funds.
What a Solo 401(k) Can Do That an SDIRA Can't
If you're self-employed (even with a side business), a solo 401(k) offers the same alternative investment flexibility as an SDIRA but with higher contribution limits and the ability to borrow from your own account.
Solo 401(k) contribution limits for 2026 are $23,500 in employee deferrals (plus $7,500 catch-up if you're 50 or older), plus employer contributions up to 25% of net self-employment income. The total cap is $70,000 ($77,500 with catch-up). That's significantly more than the $7,000-$8,000 IRA limit.
You can also do Roth contributions within a solo 401(k), which gives you the same tax-free growth on private lending returns.
The setup is a bit more involved than an SDIRA, and not all solo 401(k) providers allow alternative investments. But if you qualify, it's worth exploring as the vehicle for private lending inside a retirement account.
The Rules You Need to Follow
The IRS has specific rules about what you can and can't do with an SDIRA. Violating them can disqualify the entire account and trigger a massive tax bill. These are called "prohibited transactions," and they're not optional.
You cannot lend to yourself. Your SDIRA can't make a loan to you personally, and you can't use SDIRA-owned property for personal benefit.
You cannot transact with "disqualified persons." This includes your spouse, parents, children, grandchildren, and their spouses. It also includes any entity where you or these family members own 50% or more. Your SDIRA can't lend to your son's house purchase, for example.
You cannot mix personal and SDIRA funds in the same deal. If your SDIRA lends $40,000 on a property, you can't personally contribute another $10,000 to the same deal. The accounts must stay completely separate.
All expenses must be paid from the SDIRA. If your SDIRA-held note requires legal fees (foreclosure, for instance), those costs must come from the SDIRA, not from your personal checking account.
These rules are strict, but they're not complicated. The short version is: keep your SDIRA transactions at arm's length from you and your family. Your custodian can help flag potential issues before they become problems.
What the Process Looks Like in Practice
I've talked to lenders who were nervous about the process before they started and found it surprisingly simple once they actually did it. The typical experience goes something like this.
You choose a custodian and open the account, which takes a few days. You initiate a rollover from your existing retirement account, which takes one to three weeks depending on the sending institution. Once the funds are available, you evaluate a lending opportunity. When you're ready to move forward, you send the direction of investment to your custodian. They wire the funds. The title company records the lien. And you start receiving monthly payments into your SDIRA.
The whole setup process, from opening the account to funding your first deal, typically takes three to six weeks. After that, it runs on autopilot. Payments come in. The custodian handles the bookkeeping. You check your statements.
Is This Right for Everyone?
No. And it's important to be clear about that.
If you need liquidity (the ability to access your money quickly), private lending inside an SDIRA is not the right fit. Your capital is locked up for the term of the note, and early withdrawal from a retirement account triggers penalties and taxes.
If your retirement savings are modest and you need every dollar available for emergencies, tying up funds in a private note adds risk you don't need.
This approach works best for people who have enough saved that they can allocate a portion to a longer-term, illiquid investment. They have other funds available for emergencies. They're looking to diversify away from market-dependent returns. And they want monthly income that isn't tied to stock prices.
If that sounds like your situation, it's worth learning more about how the mechanics work and whether the numbers make sense for your goals. If it doesn't, there's no shame in keeping things simple with index funds and bonds. The right strategy is the one that lets you sleep at night.