How to Setup an IRA for Prosper

[Update: This post is now irrelevant because Prosper started offering an IRA in 2012. Prior to this you had to jump through the hoops described below. You can read my post announcing the Prosper IRA here and you can open an IRA with Prosper here.]

No one likes paying taxes. But for Prosper investors there has been no alternative but to pay taxes on the interest earned because there is no IRA option available….or so I thought.

I received an email from a fellow Prosper investor over the long weekend that introduced me to the concept of a Prosper IRA. This is not one that is officially sanctioned by Prosper but it does appear to work. Now, it is not cheap and it certainly isn’t easy, but it seems to be completely legal. If you want to make a sizable Prosper investment then you could save a great deal of money in taxes by setting it up this way.

One Prosper investor has gone ahead and done this. His name is Tym and he is happy to share his findings with everyone. Here are his instructions:

I am investing a Roth IRA in Prosper notes. I setup an account through Broad Financial. They establish an IRA under the custodian IRA Trust Services and then establish an LLC which is wholly owned by your IRA. You then create a business checking account for your LLC at any bank and establish an institutional account with Prosper. You send contributions to your IRA to IRA Trust Services, which then sends the money to your business checking account which you can then use to fund your Prosper account.

The cost is around $1200 to setup and annual fees run about $120/year, which can be paid separately from contributions. Considering the typical Roth IRA fees charged by a mutual fund company, this is a pretty good deal, especially since annual fees won’t increase with the size of your account.

Tym just has one request. If you decide to go ahead and setup an account like this that you mention his name and email address (tymothy@gmail.com). Broad Financial has a referral program and they will waive his annual fee if he refers somebody.

Another investor pointed out that other companies offer self-directed IRA’s similar to Broad Financial. Another option is Equity Trust Company which has a much lower setup fee ($50) but significantly higher annual charges that increase as your balance increases.

Keeping your peer to peer lending investments in a tax-sheltered vehicle like an IRA is smart. I have written before about the Lending Club IRA but for those investors who prefer Prosper it looks like you now have an IRA option of your own. Of course, Prosper could very well come out with their own IRA at some point but for now at least investors have a way to set one up for themselves.

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John Coktostin
Aug. 24, 2011 11:12 am

That isn’t the easiest way but if you can work it and keep up with that IRA it can definitely help you by paying much less in tax rates. Great article.