I am thrilled to hear about the new Lending Club IRA account to allow peer to peer lending in an retirement account. EntrustCAMA, part of the Entrust Group, is the account administrator. I heard of the Lending Club IRA only a few weeks ago through the comments by a beta tester on my initial review of Lending Club post.
Why is this the Lending Club IRA Big News?
- Tax Deferred status: Interest is normally treated as income which is taxed at a higher rate than capital gains which means that personal loans were handicapped as investment class against stock market investing over the long term. The Lending Club Individual Retirement Account changes that!
- Reduced Volatility: Stock market investors have learned a recent painful lesson in volatility. Volatility hurts your investment over the long run because investments earn a rate of return from the geometric average and not a simple average due to the volatility. I link to an an example below that explains the difference, but essentially all things equal consistent returns are better than volatile returns in the long run. I strongly believe that overtime Lending Club loan returns will have significantly less volatility than the stock market, with similar average returns, over the long term.
P2P Lending IRA Proposed by me in 2007
I have been hoping for a Prosper or Lending Club IRA since performing an analysis of the tax impact on P2P loans versus stock market investing. In the four scenarios outlined, a tax protected peer to peer lending portfolio beat all the other options including investing in the stock market in a Roth IRA. I published a spreadsheet with all the data examples showing you why the Lending Club IRA can likely make your retirement account grow significantly in the long run. If I have not explained volatility well enough for you — here is a link to the mathematics behind volatility.
How do you invest in a Lending Club IRA?
First, you must meet the lender requirements which include being eligible in the state where you live. Secondly there are income and net worth requirements. Both are outlined on the Lending Club website. Sign up and mail Lending Club a check before the April 15th IRA deadline to invest under the 2008 limit. (Unfortunately, I cannot invest for 2008 because I already maxed out my Roth IRA.) Of course, you can always start investing for 2009.
Will I invest in the Lending Club IRA? YES!
My original plan for 2009 was to load up on stocks at this point in time because I strongly believe that the current market provides a tremendous long-term buying opportunity. However, now I will add a Lending Club retirement account to help reduce volatility in my total portfolio in the long run.
Standard disclaimer: I know about finance but not about your personal situation. Consult your own financial adviser before acting upon this information. Thanks.
Your thoughts on the Lending Club IRA?
What do you think? Answer the poll questions and respond in the comments below.
Do you think the Lending Club IRA is a good idea?
- Yes (76%, 26 Votes)
- No (24%, 8 Votes)
Total Voters: 34
Will you invest in a Lending Club IRA?
- No (38%, 13 Votes)
- Yes (32%, 11 Votes)
- Maybe (30%, 10 Votes)
Total Voters: 34