Thinking of moving my IRA away from Vanguard to a start up

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Thinking of moving my IRA away from Vanguard to a start up

Postby RenoJay » Sat Dec 29, 2012 4:49 pm

I understand that assets which are taxed at ordinary income rates are most appropriately housed in tax deferred vehicles.

All my equity funds are at Vanguard but none of my fixed income is there. For fixed income, I did not like anything available at Vanguard (I guess you can count me in the camp of people who think bond yields do no justify the risk) so I have three CDs yielding 2.2% - 3% at various banks (Ally, Discover and a local credit union), some private money loans yielding 8.5% - 15% collateralized by homes/autos, and some peer-to-peer (P2P) lending at LendingClub.com and Prosper. All of my fixed income interest is currently taxed as ordinary income at my marginal rate of 35%.

While I realize many Bogleheads will disagree with my fixed income choices, let's please get past that as I have questions about moving my Roth IRA. I've been doing the P2P lending for about three years, and it's pretty consistently returned 8% - 11% before taxes. I'm comfortable with this form of fixed income for now. At such point as bond yields approach their historical averages, I'll be happy to move out of all this weird stuff into a normal bond fund. Given that it'll likely be a long time for bond yields to get to their historic averages, I'm thinking of transferring my Roth IRA to LendingClub.com to get some tax benefit on the income I'm earning. LendingClub is a start up but supposedly the investor funds are shielded in the event the underlying company has issues.

My questions for the BogleHeads:

1. Before considering moving my IRA to LendingClub, what questions should I ask LC and/or Vanguard?
2. Anyone know if this would be considered a "self-directed" IRA after the move? If so, what pitfalls would I need to avoid to keep the IRA benefits?
3. How hard is to to move the IRA back to Vanguard in a few years if/when bond yields meet my criteria for investment? (At that point, I'll go to the 3 fund portfolio at Vanguard and be done with the funky alternatives.)
4. What other eventualities should I think about?
5. For the sake of argument, assume that you agreed with me on bonds/fixed income and that you had the investment mix I do. Would you move your IRA to LendingClub or keep it at Vanguard (where it currently holds equity funds and therefore isn't providing all the much tax benefit)?
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Re: Thinking of moving my IRA away from Vanguard to a start

Postby tfb » Sat Dec 29, 2012 5:03 pm

RenoJay wrote:My questions for the BogleHeads:

1. Before considering moving my IRA to LendingClub, what questions should I ask LC and/or Vanguard?
2. Anyone know if this would be considered a "self-directed" IRA after the move? If so, what pitfalls would I need to avoid to keep the IRA benefits?
3. How hard is to to move the IRA back to Vanguard in a few years if/when bond yields meet my criteria for investment? (At that point, I'll go to the 3 fund portfolio at Vanguard and be done with the funky alternatives.)
4. What other eventualities should I think about?
5. For the sake of argument, assume that you agreed with me on bonds/fixed income and that you had the investment mix I do. Would you move your IRA to LendingClub or keep it at Vanguard (where it currently holds equity funds and therefore isn't providing all the much tax benefit)?

1) What it takes to waive fees.
2) I think so but LC's custodian takes care of that for you.
3) You might have to sell all your notes in the IRA and pay a termination fee. Would you have trouble selling? If so, what's the fee on partial transfer out as the notes come due?
4) Don't know.
5) LendingClub
Harry Sit, taking a break from the forums.
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Re: Thinking of moving my IRA away from Vanguard to a start

Postby Alan S. » Sat Dec 29, 2012 8:20 pm

As you indicated, this is a start up, and their indicated default rate of around 2.5% is pretty green and looks low, although an increasing default rate could be offset by higher interest rates or fees. I would be equally concerned with seasoning of the numbers for this business model than economic changes affecting the default rate. The self directed IRA custodian will have to handle the usual IRS required reporting, but there shouldn't be a risk of prohibited transactions involving the loans.

I wonder if there is any potential litigation exposure from the established lending industry relative to regulatory or other advantages that PtoP may have. Big fish don't like to have their waters invaded.. :annoyed
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Re: Thinking of moving my IRA away from Vanguard to a start

Postby FNK » Sat Dec 29, 2012 8:35 pm

The usual rules of tax-efficient asset location apply here. Buy equity in taxable accounts, put debt in tax-advantaged accounts.
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Re: Thinking of moving my IRA away from Vanguard to a start

Postby RenoJay » Sat Dec 29, 2012 8:53 pm

Alan S. wrote:As you indicated, this is a start up, and their indicated default rate of around 2.5% is pretty green and looks low, although an increasing default rate could be offset by higher interest rates or fees. I would be equally concerned with seasoning of the numbers for this business model than economic changes affecting the default rate. The self directed IRA custodian will have to handle the usual IRS required reporting, but there shouldn't be a risk of prohibited transactions involving the loans.

I wonder if there is any potential litigation exposure from the established lending industry relative to regulatory or other advantages that PtoP may have. Big fish don't like to have their waters invaded.. :annoyed


Alan, thanks for the thoughts. Sounds like your concerns are primarily related to the business model of the start up. If there were litigation that somehow invalidated this business model, do you feel like that could ultimately directly affect the individual lenders (aside from us not being able to make more loans.)?
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