Can I Hold a Mortgage in My IRA Account?

You can use other people's mortgages to pay for your retirement.

You can use other people's mortgages to pay for your retirement.

When you think about a mortgage from a lender's perspective, it's a pretty decent investment, especially if it's a stable loan made on a property with equity to a borrower that can afford it. After all, when you make a mortgage, you get monthly payments of interest and principal that can last for decades. It sounds like a perfect investment to hold in an Individual Retirement Account. While it is possible to hold an actual mortgage in an IRA, it requires some extra work and expense. You can, however, hold mortgage stocks and bonds in most traditional IRAs.

Mortgage REITs

A real estate investment trust is like a mutual fund, but instead of being made up of stocks, bonds or commodities, it's made up of real estate investments. While REITs have traditionally been ways for you to buy into buildings, mortgage REITs buy portfolios of mortgages and pay the returns to you. They're a little more complicated than they seem, though, as many inflate their returns by borrowing low-interest-rate money on the short-term market to buy long-term mortgages that have higher interest rates.

Mortgage Bonds

If your investing strategy includes buying bonds, you can purchase mortgage bonds in your IRA. A mortgage bond is similar to any other bond, except that instead of being backed by a company's assets or a government's promise to pay, it's backed by the individual homes of the people whose mortgages are pooled into the bond. Mortgage bonds also carry the risk that you could get paid off early if everyone pays off their mortgage before the maturity date.

Self-Directed IRAs

To make your own mortgages directly to individual borrowers, you will need to set up a self-directed IRA account. Self-directed IRAs give you more latitude as to how you can invest the money in your IRA, letting you go beyond stocks, bonds and certificates of deposit. When you set up a self-directed IRA, you will have to pay account maintenance fees to the third-party custodian. The custodian holds your money and invests it when and where you tell them to -- in other words, at your discretion.

Holding Your Own Mortgage

If you choose to set up a self-directed IRA and invest in mortgages, you can't hold your own mortgage note in your IRA. While this might seem like a great idea because you'd be paying interest to yourself and building your wealth instead of your lender's, the IRS strictly prohibits what they call self-dealing. The money in your IRA has to be for the benefit of the IRA, not for you or for your family (the "self" in self-dealing). If your IRA holds your mortgage, you're benefiting from it personally, as you get to live in the house.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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