When most people think about investing their retirement funds, they picture the stock market-not local governments auctioning off unpaid property taxes. But that’s exactly what tax lien investing is, and for many self-directed investors, it’s a hidden gem: a low-volatility strategy with the potential for high, fixed returns.
If you’ve ever wondered how tax liens work and whether they could fit inside your IRA, this article will walk you through the basics.
What Is a Tax Lien?
When a property owner fails to pay their property taxes, the local government still needs to collect that revenue to fund schools, roads, and public services. Instead of pursuing the homeowner directly, many counties place a lien on the property for the unpaid taxes and then sell that lien to investors through an auction.
As the investor, you’re essentially fronting the delinquent taxes on behalf of the property owner. In return, you receive a certificate stating the amount owed plus the interest rate (set by the county or state).
When the property owner eventually pays their back taxes, they’re required to repay you the full amount plus interest. That interest (typically between 8% and 18%, depending on the jurisdiction) is your profit.
Why Tax Liens Are Unique
Tax lien investing is a bit different from other real estate strategies. You’re not buying the property itself, you’re buying the right to collect the debt attached to it.
This creates a few distinct advantages:
- Predictable returns: Your return is set by statute. If a county offers 12% interest, you know exactly what you’ll earn once the lien is redeemed.
- Secured by real property: Your investment is backed by the real estate itself. In rare cases where the owner never redeems, you can move to foreclose and potentially acquire the property.
- Diversification: Tax liens often perform independently of the stock market, making them an appealing alternative asset for balanced portfolios.
That said, not all liens are equal. Due diligence is essential. Understanding the property’s value, location, and redemption laws in that specific county helps protect your investment.
How to Invest in Tax Liens with a Self-Directed IRA
A Self-Directed IRA (SDIRA) allows you to use your retirement funds to invest in alternative assets like real estate, private lending-and yes, tax liens.
Here’s how it works:
- Open and fund your SDIRA. You can roll over or transfer funds from an existing IRA or 401(k).
- Identify opportunities. Research counties that hold regular tax lien auctions and review their investor requirements.
- Perform due diligence. Evaluate each lien before bidding (confirm the property value, condition, and any existing mortgages).
- Submit your buy direction letter. Once you decide to purchase, your IRA custodian or administrator (like MidAtlantic IRA) will process the transaction directly from your account.
- Earn interest when redeemed. When the property owner repays their taxes, the county sends payment to your IRA, tax-deferred or tax-free, depending on your account type.
This structure lets you keep your earnings within the IRA, compounding over time and preserving your tax-advantaged status.
Risks and Considerations
Like any investment, tax liens carry risks. Redemption timelines vary by state, and not every lien will redeem quickly. Some properties may have environmental issues or structural damage that affect long-term value.
That’s why it’s important to:
- Focus on counties with clear lien laws and active markets,
- Avoid overbidding at auctions, and
- Work with professionals who understand both the tax lien process and IRA compliance rules.
At MidAtlantic IRA, we don’t sell or endorse specific investments, but we help you navigate the self-directed IRA process from start to finish so your funds stay compliant while you explore alternative opportunities confidently.
Disclaimer: MidAtlantic IRA, LLC does not provide investment, tax, or legal advice. Individuals should consult appropriate professionals before making any investment decisions.