Is the Lending Club IRA a good option for your investments? Most Lending Club investors put their money into Lending Club with a standard, taxable account. Unfortunately, lending club investments do not receive that great of tax treatment. Lending Club income is taxed as ordinary income, which could erase anywhere from 20% to 35% of your profits.
In order to avoid getting stuck paying taxes on Lending Club loans, you could invest into a Lending Club IRA account. The Lending Club IRA receives much more favorable tax treatment than a standard Lending Club account, but it does tie up your money until retirement. The company offers both a Traditional IRA and a Roth IRA. With a traditional IRA, you receive a tax deduction on your investment up front, but with a Roth IRA, you receive tax-free growth for the rest of your life. Lending Club does allow investors to roll-over old 401K plans into a Lending Club IRA. There’s also a “Prime IRA” option in which Lending Club will automatically invest in Lending Club loans on your behalf.
Making an investment in Lending Club loans or other peer-to-peer loans is considered to be an alternative investment. As a result, Lending Club’s IRA is referred to as a “self-directed” account, meaning that you are managing your own money rather than indirectly via an account with a brokerage or mutual fund company. Lending Club partners with SDIRA to serve as an administrator for your Lending Club IRA account.
You’re allowed to put up to $5,000 into an IRA account each year, or $6,000 if you’re 50 years old or older. There are also income limits. Investors that make more than $105,000 per year are only able to make a partial contribution. Individuals that make more than $120,000 per year can’t contribute to an IRA. For couples that are married filing jointly, the phase-out begins at $167,000 for a partial contribution and families that make more than $177,000 per year cannot make any contributions to an IRA.
If you’re already putting money into another IRA account and fully funding it each year, you can’t open a second IRA account. That’s probably the biggest trade-off with the Lending Club IRA. By putting money into a Lending Club IRA, you give up the opportunity to save for retirement with stocks and bonds in your IRA. This might not be an issue if you already have a well-funded 401K plan, 403B plan or Thrift Savings Plan at work.
Many investors have reported good returns by putting money into Lending Club loans, however the peer-to-peer lending industry has only been around for about five years. Lending Club loans are considered an “alternative investment” and there’s always the possibility that your borrowers could default. Most of your defaults can be avoided if you pick out a good strategy to select loans. Lending Club’s suitability requirements state that investors should not invest more than 10% of their net worth in peer-to-peer loans.
If you have a retirement plan through work and aren’t using an IRA for anything elsem Lending Club’s IRA could be a great choice to eliminate the amount of taxes that you pay on your Lending Club investment. If you’re banking on your Lending Club account to serve as your sole source of retirement income, you are signing up for a lot of un-necessary risk.