When peer to peer lending and Lending Club first came about many people started looking at it as another means of saving for retirement, like the Lending Club IRA. It wasn’t long though before people started realizing that Lending Club investments do not receive the greatest treatment when it comes to the tax man. The income that people receive from Lending Club is taxed as ordinary income which means that you could lose 20 to 35% of your profits just like that. Don’t worry though because things aren’t all bad, there are definitely some ways that you can work around having to pay those huge taxes on your Lending Club earnings.
The biggest thing that you can do to cut down on your tax losses if you are using Lending Club for your retirement is to invest into a Lending Club IRA account. This type of account gets a much more favorable tax treatment when compared to your standard Lending Club account. Lending Club offers both a Traditional IRA as well as a Roth IRA. When using their Traditional IRA account you will receive a tax deduction on your investment up front. With the Roth IRA however, you will be able to enjoy tax free growth for the rest of your life.
Another great option for people is that Lending Club allows investors to roll over their old 401K plans into a Lending Club IRA. Lending Club also offers their investors a Prime IRA option where Lending Club will automatically invest in Lending Club loans on your behalf.
One of the things that is still making the whole process not quite as smooth as it could be is the fact that Lending Club loans and other peer to peer loans are still seen as “alternative investments” by most institutions. The Lending Club IRA is referred to as a “self directed” one which means that you are responsible for managing your own money rather than the traditional method which is indirectly by way of an account with a brokerage or mutual fund company. Lending Club does partner up with SDIRA however to act as an administrator for your IRA account.
With your new Lending Club IRA account you are permitted to put in $5,000 per year or $6,000 if you are over 50 years of age. Income limits apply as well and investors that earn more than $105,000 per year are only allowed to make partial contributions. Those that are making more than $120,000 per year are not eligible to contribute to an IRA. Things work a bit differently for couple that are filing jointly with the cut off point for partial contributions being $167,000 and the cut off point for eligibility being $177,000 per year.
There are some other things to think about as well before just going and opening up a Lending Club IRA. Probably one of the biggest drawbacks is that if you are already putting money into an IRA account (whether Lending Club or otherwise) then you can’t open up a second IRA account. When you put money into a Lending Club IRA you are essentially giving up the opportunity to save for retirement through stocks and bonds in your IRA. If you already have a well funded 401K plan, 403B plan or Thrift Savings Plan then this could be a big problem for you in terms of how you handle your investments.
If you have a retirement plan through work and you aren’t already using an IRA for anything else then creating a Lending Club IRA account could be a great move for you. It is an awesome way to eliminate the amount of taxes that you will end up paying on your Lending Club investment. However if you are trying to make Lending Club as your main source of retirement funds then you are probably asking for a lot more trouble than you really need. A Lending Club IRA can be a great way to save for your retirement but you shouldn’t try to put all of your eggs in one basket. That goes for any type of investment.