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The Best Way to Invest in P2P Lending is with an IRA

by Peter Renton on March 22, 2013

Prosper IRA Impact of Taxes on Return

In the mid 1990’s I didn’t grasp the importance of the above graph (taken from Prosper’s IRA page). I was young and foolish when it came to thinking about retirement. I was the owner of a successful small business and I just didn’t think I needed a retirement plan. As I said I was young and foolish.

Luckily an ex-girlfriend convinced me of the error of my ways and I opened an IRA. In eighteen years that IRA has grown to almost $250,000 through the joy of compounding and making the maximum contribution every year. I recently did a Roth conversion on my IRA so now I know this money will be available tax-free once I reach retirement age.

This year I will be taking a large portion of this IRA and adding it to my investments in Lending Club and Prosper. I feel that there is no better way to grow your money tax free than in a high yielding investment like p2p lending. Taxes are a major drag on investment returns where interest is treated as ordinary income and I would like to avoid that tax burden as much as I can.

Lending Club IRA

I have had IRAs at Lending Club for several years now. I consolidated and rolled over my wife’s retirement accounts into Lending Club back in April 2010. In fact 100% of my wife’s retirement assets are in Lending Club and I am very comfortable with that. I also have a Roth IRA in my own name that I will be adding to substantially this year.

On Lending Club’s home page they claim that 95% of IRA account holders are earning 6% or more on their investments. No doubt most of these accounts are well diversified. You can open up an IRA at Lending Club with as little as $5,000 which means you can invest in 200 different loans. Just make sure you add another $5,000 to your account within 12 months to keep your balance above $10,000 to avoid the $100 fee.

Opening an IRA account at Lending Club is a little more complicated than just opening a regular taxable account. Lending Club uses a third party custodian, SDIRA Services, so you have to open an account with them as well as with Lending Club. But the initial hassle is well worth it as you don’t have to deal with taxes and your money grows tax free.

Prosper IRA

Prosper was not an option at the time I setup my IRAs at Lending Club, they introduced the Prosper IRA for the first time in January last year. I will be opening my first IRA at Prosper this year when I rollover part of my existing Roth IRA.

Prosper has a similar deal as Lending Club where you need a minimum of $5,000 to open an IRA account and you need to have a $10,000 balance within 12 months to avoid any fees. Prosper uses Sterling Trust as their custodian so you need to open an account with them as well as with Prosper to setup your IRA.

 You Still Have Time to Contribute to an IRA for 2012 

Investors have until April 15 to contribute to an IRA at Lending Club and Prosper. But don’t wait until the last day if you are opening a new account. It takes several days for your IRA to be setup and funded and you will miss the April 15th deadline if you wait too long.

You can also rollover any existing IRA (Roth, Traditional, SEP or SIMPLE) or 401(k) into Lending Club or Prosper. This is what I did with my wife’s retirement accounts – she had four different 401(k)’s and 403(b)’s from various different jobs and I rolled them all into an account an Lending Club.

I truly believe that if at all possible every investor should put some of their retirement money into p2p lending. Even if you are young don’t be foolish like I was and ignore your retirement. You will not only save a fortune on taxes and you will be able to fully enjoy the wonderful power of compound interest.

So now let’s hear from you. Do you have a retirement account at Lending Club or Prosper? If not why not? I am always interested to hear your comments.

{ 14 comments… read them below or add one }

writing2reality March 22, 2013 at 11:05 am

I have both a taxable and Roth IRA account with Lending Club and I plan on expanding to Propser in some fashion later this year. Part of the reason I expanded from just a taxable account by adding an IRA was for tax benefits you’ve mentioned. As of now, this money will compound and grow over the next 30+ years before I am even eligible to take normal distributions at 59 and a half.

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Peter Renton March 22, 2013 at 11:50 am

Good for you. I think it should be a priority for every young person to max out their retirement plan contributions if at all possible.

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SarahV March 22, 2013 at 11:13 am

I’ve been putting money into a Roth IRA since I was 21 years old. It’s a great thing to do, especially if (like me) you don’t have an employer-matched 401k.

I wish very much that I could have a Lending Club IRA, but as you know, they won’t let me have one and they refuse to clarify who can and can’t start one and why… :-(

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Peter Renton March 22, 2013 at 11:52 am

Sarah, I thought of you as I wrote this post and I even sent a follow up email to Lending Club to see if can extract an official answer out of them. I have not given up hope in finding an answer.

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SarahV March 22, 2013 at 12:18 pm

The final answer is “no,” but there is no way any other people like me applying for an IRA in the future would know that from their website. It has specific wording saying that I can use the secondary market in an IRA in Massachusetts, and it let the application go through and told me where to send the money etc. If I didn’t know better I would think it was some kind of scam they had going (I’m still waiting for my check to be returned).

Do they have so few investors that this has never come up before? It’s hard to believe.

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Peter Renton March 23, 2013 at 8:57 am

That is crazy. If it is not available then make it clear. Unimpressed.

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SarahV March 23, 2013 at 10:02 am

Yeah, unimpressed is right. It has still not been fixed. If I try to sign up for an IRA right now it still says:

“As a resident of Massachusetts, you are only allowed to invest in Lending Club notes trading on the secondary market. You can do so using the trading platform operated by FolioFN, which you can use with an IRA Account”

Why on earth would they have put that message there if it is not true? It is awfully specific to be a mistake. And how long will it take them to fix it?

PennySaved March 22, 2013 at 11:24 am

I started a Roth IRA at Lending Club this year in January- $6500 because I am over 50. I am still working on getting all the money invested in notes. Have about $600 more to go. I plan to put another $6500 in next January so I can be over the $10,000 min amount to avoid IRA fees. I am thinking about investing more in B and C notes in the Roth IRA. Plus to get the money invested quicker, I could not wait around too long for enough acceptable D, E, F notes to be available.I can’t write off the defaults like I can with my taxable LC account. That account started out with A and B loans in 2099 when I began, but in 2012 I started to invest in the more riskier, but profitable notes. I also try to pick newly issued notes on different days for each account to avoid overlapping notes. I am still doing $25 per note.

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Peter Renton March 22, 2013 at 11:55 am

That is a good point that I failed to mention. You cannot get the benefit of writing off losses in an IRA account so it makes sense to skew to a slightly more conservative approach. There is always a plethora of B & C grade notes to invest in so it would be easier to put your money to work quickly investing this way.

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Cliff_S March 23, 2013 at 10:33 am

I opened my first LC account (taxable) in January. I also had a small IRA with the same company that manages my 401K that I rolled over into a Roth IRA w/LC in February. I will be leaving my current employer at the end of May and will likely roll over a substantial amount sitting in my 401K into my Roth IRA w/LC.
I really like the LC model combined with the tax advantages of an IRA. I also really like that they are a SDIRA. For investors that like to take control of their retirement accounts and want to look outside the traditional investment options a SDIRA opens up many possibilities.

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Matt March 25, 2013 at 11:49 am

Do Financial Suitability Requirements apply with regards to retirement accounts?

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sy March 25, 2013 at 12:46 pm

Has anyone contributed to traditional nondeductible ira with lending club then converted to roth, wondering how easy/hard is it?

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Jacob B July 18, 2013 at 9:41 pm

Has anyone converted a standard (non-retirement) LC account into a LC IRA? How do you do it?

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Peter Renton July 19, 2013 at 9:51 am

There is no simple way to do a “conversion” from a taxable for a retirement account. Retirement accounts are subject to limits and are treated separately. If you want to make a new retirement account contribution and use the money in your taxable account the only way to do that would be to sell your notes on Folio (the trading platform) and then withdraw the cash before transferring to an IRA account.

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