Can an IRA lend to a sibling? The disqualified persons rule doesn't cover them the way it covers a spouse or child

Question

Consider a rollover IRA that's mostly idle, and a sibling who buys and rehabs small houses and could use funding for one. The instinct is to assume family is off limits here. The actual rule is narrower. Disqualified persons under IRC 4975 cover the account owner, their spouse, ancestors and lineal descendants and their spouses, along with certain fiduciaries and entities they control. Siblings are not on that list, so lending to a brother or sister is generally permitted where lending to a parent or child would not be. Permitted is not the same as safe by default. The loan needs a written note with a market rate of interest and real repayment terms, it needs to be funded and repaid entirely through the IRA rather than any personal account, and the arrangement should be treated with the same documentation rigor as a loan to a stranger. Anyone considering this is well served by getting the structure reviewed by a professional who works with self-directed accounts before funds move, since a poorly documented loan to a family member is one of the more common ways these accounts run into trouble.

Rena Guide · Accepted Answer

The list of disqualified persons in the code covers you as the account owner, your spouse, your lineal ascendants and descendants (parents, grandparents, children, grandchildren) and their spouses, anyone acting as a fiduciary or service provider to the plan, and entities that those people own or control at the 50 percent level. Siblings, aunts, uncles and cousins are not named. So a loan from your IRA to a brother is not automatically a prohibited transaction, though whether a specific arrangement crosses the line depends on the facts and on how the statute applies to them, and that's a question for a tax attorney rather than a forum.

The thing that turns a permitted sibling loan into a problem is indirect benefit. If you get something out of the deal personally, a fee, a share of the flip profit, use of the house, forgiveness of a debt he owes you, the transaction can be attacked even though he isn't on the list. Also check the ownership of whatever entity is borrowing. If his LLC has you or your spouse as a member at 50 percent or more, that entity is disqualified even if he manages it.

Mechanically the loan has to be the IRA's loan and not yours. The note names the custodian for the benefit of your IRA. The money wires from the IRA. Payments go back to the IRA and never into your checking account, not even for a day. Terms should look like what an unrelated lender would write, secured by a recorded mortgage or deed of trust (which instrument and how it's recorded varies by state).

The reason people are careful here is the penalty. A prohibited transaction can be treated as distributing the entire account as of the first day of that year, so the whole balance becomes taxable at once.

joe_delgado5 · Answer

The rehab timeline is what I'd worry about more than the family question. Flips run long, and when a borrower is your brother the conversation about extension fees and default interest is one you'll avoid having. If you can't imagine yourself starting foreclosure on him, the loan is priced wrong no matter what the rate says.

bmoreno23 · Answer

Wait, so parents are disqualified but siblings aren't? What's the reasoning there?

karen_whitfield · Answer

@bmoreno23 there isn't a satisfying one. The statute lists lineal relationships and stops. Sideways relatives fall outside the text. It's a drafting line rather than a policy about who you're close to.

nicole_adeyemi · Answer

The collateral deserves as much attention as the paperwork. If he is buying a lot with a house on it and the plan involves a lot split or a variance, the value the IRA is lending against might not exist yet. Appraisals get written to a rezoning that never comes. Lend against the dirt as it currently sits.

angela_burke · Answer

Nobody has mentioned the servicing. If your brother mails you a check and you deposit it into the IRA yourself, you have handled retirement money personally, and the trail looks bad even if the loan is clean. A third party servicer runs about 20 a month and the borrower pays them directly. That is cheap insurance for the paper trail.

mitchell_ray4 · Answer

Ask what his contingency is on the build. A 40k scope on an older house with knob and tube or a failed sewer lateral goes to 55k fast, and then he's back asking the lender (you) for more money. Decide in advance whether the IRA will fund an increase, and put a draw schedule in the note.

tashaford30 · Answer

This thread should leave anyone less sure than they started, which is probably the correct place to land. "Legally permitted" and "a good idea with your brother" are two different tests, and only one of them has a statute.

Can an IRA lend to a sibling? The disqualified persons rule doesn't cover them the way it covers a spouse or child

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