Self-Directed IRA Loans to Family: What the IRS Actually Allows (2026)
TL;DR
Self-directed IRA loans to family are allowed for some relatives and strictly prohibited for others, and the line is drawn by the disqualified persons rules under IRC Section 4975. Your IRA cannot lend to you, your spouse, your parents or grandparents, your children or grandchildren, or your children’s spouses, because those are disqualified persons and the loan is a prohibited transaction that disqualifies the entire account. Your IRA can often lend to siblings, aunts, uncles, cousins, nieces, and nephews, because they are not disqualified persons, as long as the loan is a genuine arms-length investment with a promissory note and market-rate interest. This guide covers exactly who you can and cannot lend to, how to structure a compliant loan, and what it costs if you get it wrong. New to these accounts? Start with .
Can a Self-Directed IRA Loan Money to Family?
Sometimes. It depends entirely on which family member, because the IRS divides your relatives into two groups: disqualified persons (off limits) and everyone else (potentially allowed). This is the single most misunderstood point in self-directed IRA private lending.
The simple version: your IRA cannot lend to your closest lineal family (spouse, parents, children, grandparents, grandchildren), but it can lend to more distant relatives like siblings and cousins. A loan to a disqualified person is an automatic prohibited transaction, while a loan to a non-disqualified relative is just another investment, provided it is structured at arms-length for the IRA’s benefit. The next section shows exactly where each relative falls.
Which Family Members Are Disqualified Persons?
A disqualified person under IRC Section 4975 includes you, your spouse, your ancestors, your lineal descendants, and the spouses of your lineal descendants. In plain English, your IRA cannot transact with the people closest to you on your direct family line. Anyone outside that line is generally fair game.
| You CANNOT lend to (disqualified persons) | You MAY be able to lend to (not disqualified) |
|---|---|
| Yourself and your spouse | Siblings (brothers and sisters) |
| Your parents and grandparents (ancestors) | Aunts and uncles |
| Your children and grandchildren (lineal descendants) | Nieces and nephews |
| Your children’s or grandchildren’s spouses (son or daughter-in-law) | Cousins |
| Any business or entity owned 50% or more by disqualified persons | Friends and unrelated third parties |
Gray areas to clear with an advisor first: stepchildren, parents-in-law and other in-laws (besides a son or daughter-in-law, who are disqualified), and any relative connected to a business you or your family control. These are not clearly defined by the statute, so get a written professional opinion before lending. For the full framework, see our and the .
Self-Directed IRA Loans to Family: What the IRS Actually Allows
What the IRS actually allows is a bona fide loan from your IRA to a non-disqualified family member, treated as an investment that earns a return for the account. The borrower can be a sibling, aunt, uncle, cousin, niece, or nephew, and the loan can be secured or unsecured, short-term or long-term.
What the IRS does not allow is any loan, in any amount, to a disqualified person, even with perfect paperwork and market interest. The prohibited transaction is the act of extending credit to a disqualified person (an “extension of credit” under IRC Section 4975(c)(1)(B)), not the terms. It also does not allow you to benefit personally from the loan, to co-sign it, or to use the IRA’s loan to prop up a business you or your lineal family control. The rule of thumb: if the loan benefits a disqualified person directly or indirectly, it is prohibited; if it benefits only your IRA and an unrelated or distant relative, it is allowed.
How to Structure Self-Directed IRA Loans to Family Correctly
A compliant self-directed IRA loan to family is structured exactly like a loan to a stranger, because the IRA must benefit, not the borrower. Sloppy or sweetheart terms are what turn an allowed loan into a problem. Use these six rules:
- Use a written promissory note that names the IRA (not you) as the lender.
- Charge a market interest rate, at or above the , so the loan is not a disguised gift.
- Set a clear repayment schedule with defined dates and amounts.
- Secure the loan with collateral where possible (a secured or non-recourse note protects the IRA).
- Direct every payment back into the IRA, never to your personal account.
- Take no personal benefit, fee, or side arrangement from the deal.
Done this way, the loan is simply inside your IRA, and the interest it earns flows back tax-deferred or tax-free. Done casually, with below-market interest or no note, it invites the IRS to recharacterize it as a prohibited transaction.
What Happens If Your IRA Lends to a Disqualified Person?
The consequence is severe and it hits the whole account, not just the loan. When your IRA lends to a disqualified person, the IRS treats the entire IRA as distributed on January 1 of the year the loan occurred. The full balance becomes taxable income that year, plus a 10% early withdrawal penalty if you are under 59.5.
Consider a $25,000 loan to your son from a $250,000 IRA. Because your son is a disqualified person, the IRS does not tax the $25,000; it treats the full $250,000 as distributed. At a 24% rate that is roughly $60,000 in income tax, plus a $25,000 penalty, so about $85,000 lost over a $25,000 favor. A separate 15% excise tax (rising to 100% if not corrected) under IRC Section 4975 can also apply to disqualified persons other than the IRA owner. The lesson is blunt: never lend to a disqualified person, regardless of the terms.
How Can You Help a Family Member You Cannot Lend To?
If the person you want to help is a disqualified person, you still have legitimate options that do not touch the prohibited transaction rules:
- Name them as a beneficiary of your IRA so they inherit it later.
- Open a custodial Roth IRA for a minor child who has earned income, building their own retirement savings.
- Use personal funds, not IRA funds, to lend or gift directly, which avoids the rules entirely.
- A 60-day rollover lets you take money out of your own IRA temporarily, but you must redeposit it within 60 days, you can only do this once per 12 months, and it is not a loan to the family member. Miss the window and it becomes a taxable distribution, so treat it as a last resort, not a lending strategy.
When in doubt, helping with personal money is always cleaner than risking your retirement account.
Key Takeaways
- Self-directed IRA loans to family are allowed for non-disqualified relatives (siblings, aunts, uncles, cousins, nieces, nephews) and prohibited for disqualified persons (spouse, parents, grandparents, children, grandchildren, and children’s spouses).
- Disqualified persons are defined by IRC Section 4975 as your spouse, ancestors, lineal descendants, and the spouses of your lineal descendants.
- A loan to a disqualified person is a prohibited transaction (an extension of credit) that disqualifies the entire IRA, triggering taxes plus a 10% penalty if you are under 59.5.
- An allowed loan must be arms-length: a written promissory note, market interest at or above the IRS Applicable Federal Rate (AFR), a repayment schedule, ideally secured, with all payments returning to the IRA.
- Stepchildren and most in-laws are gray areas. Get a written professional opinion before lending to them.
- If you want to help a disqualified family member, name them as a beneficiary, fund a custodial Roth, or use personal funds rather than risking the account.
FAQ's
Can I loan my SDIRA money to my adult child who is not financially dependent on me?
No. Adult financial independence does not remove the disqualified person status. The IRS defines disqualified persons by relationship, not by financial dependency. Your adult, financially independent child is still a lineal descendant under IRC Section 4975, and any loan from your SDIRA to them is a prohibited transaction. The outcome is the same: your entire IRA loses its tax-exempt status as of January 1st of that year.
What about lending to my sibling? Is that actually legal?
Yes, siblings are not included in the statutory definition of disqualified persons. Your SDIRA can legally loan money to a brother or sister. The loan must be documented with a promissory note, must carry an interest rate at or above the IRS Applicable Federal Rate, and all payments must flow back to the IRA account. Your SDIRA custodian processes the transaction. You do not personally handle the funds.
Can I withdraw money from my SDIRA and personally lend it to my child as a regular loan?
You can withdraw funds from your IRA. If you are 59.5 or older and have a traditional IRA, you pay ordinary income tax on the withdrawal. If you are under 59.5, you also owe a 10% early withdrawal penalty. Once the money is out of the IRA and in your personal account, it’s yours to use as you choose, including lending it to a family member. But the tax hit on withdrawal, especially for a large IRA, often makes this the most expensive way to accomplish the goal. Running the math with a CPA before using this approach is strongly advisable.
What is the 60-day rollover rule, and can I use it to briefly loan money to my spouse?
The 60-day rollover rule lets you withdraw funds from an IRA and redeposit the same amount into the same or a different IRA within 60 days, with no tax consequences. During those 60 days, you have the cash. Some investors consider using this window to briefly provide funds to a family member. The risks are significant: you can only do one IRA-to-IRA rollover per 12-month period across all your IRAs, not per account. If the 60 days expire without full redeposit, the entire withdrawal becomes a taxable distribution. Using this approach as a mechanism to benefit a family member also raises self-dealing concerns. It is not a clean workaround.
Does my SDIRA have to charge interest on a loan, or can it be interest-free?
Your SDIRA must charge at least the IRS Applicable Federal Rate to avoid below-market loan reclassification. An interest-free loan to any party, including a non-disqualified family member, can be challenged by the IRS as a distribution from the IRA equal to the foregone interest. The IRS publishes updated AFR tables monthly. For real estate-backed loans, most SDIRA private lenders charge significantly above the AFR to reflect actual market rates and compensate for the investment risk.
Can my stepchild receive a loan from my SDIRA?
Stepchildren fall into a gray area, but most IRA compliance attorneys treat them as disqualified persons under the spirit of the law, regardless of whether they are formally adopted. The IRS list of lineal descendants includes stepchildren in practical application, and custodians typically refuse to execute transactions involving a stepchild of the IRA holder. Do not assume a stepchild is safe just because they are not explicitly named in the statute. Get a written compliance opinion from an SDIRA attorney before proceeding.
Can I cosign a loan for a disqualified family member using my SDIRA as collateral?
No. Using your SDIRA as collateral for a loan, whether to yourself or to a disqualified family member, is itself a prohibited transaction. The IRS prohibits pledging IRA assets as security for personal borrowing. Even indirectly using the IRA as backing for a family member’s financing arrangement runs into prohibited transaction risk. This is a bright-line rule with no exceptions.
If my SDIRA loans money to my cousin and they default, what happens?
Your SDIRA holds the promissory note and, if the loan was secured, the lien or security interest on the collateral. If your cousin defaults, the IRA has the right to pursue the collateral through foreclosure or repossession, depending on the security agreement. Costs of collection, including legal fees, must be paid from the IRA. The IRA’s tax status is not affected by a default on a legal loan to a non-disqualified person. That is a fundamentally different situation from a prohibited transaction, which disqualifies the IRA regardless of whether the loan performs.
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