Our October Client Strategy Group dug into one of the most overlooked yet powerful income strategies available to self-directed investors: tax liens.
For seasoned investors, tax liens can be an attractive way to earn consistent, often double-digit returns backed by real property. But inside an IRA, success depends on process and precision from due diligence to documentation.
If you joined this month’s Client Strategy Group, this article expands on the key points we covered. If you couldn’t make it, consider this your technical companion to catch up.
Why Tax Liens Appeal to IRA Investors
Tax liens represent the amount of unpaid property taxes owed to a municipality. When you purchase a lien, you essentially step into the county’s position as creditor. The property owner must repay you-plus interest-to clear their title.
What makes them particularly appealing within an IRA:
- Predictable, statutory returns. Interest rates are defined by the state, often between 8%–18%.
- Low correlation to markets. Returns are driven by redemption timelines, not stock market performance.
- Capital preservation potential. Your investment is secured by the underlying real estate, and in rare cases of non-redemption, you may foreclose to acquire the property.
Inside a Self-Directed IRA, these earnings can compound tax-deferred or tax-free, depending on your account type-maximizing the power of consistent, predictable gains.
Due Diligence: What to Verify Before You Bid
Before participating in a lien auction, you’ll want to go beyond the interest rate. Here are the key factors to evaluate:
- Property Condition and Location. Confirm that the property backing the lien actually exists, is accessible, and holds value. Vacant lots, condemned buildings, or landlocked parcels can create challenges during redemption or foreclosure.
- Senior Liens or Encumbrances. Remember: a tax lien is not always first position. Some jurisdictions may allow HOA, utility, or municipal liens that supersede yours. A title search or review of county records helps prevent unpleasant surprises.
- Redemption Periods. Each state defines how long a property owner has to redeem their lien, ranging from a few months to several years. Longer redemption periods may mean higher returns, but also tie up your capital for longer.
- Auction Rules and Payment Deadlines. Procedures vary by county. Some auctions require immediate payment, others allow time for settlement. Make sure your IRA custodian or administrator can process funds within those timeframes, especially since custodians cannot “front” payments or use personal funds temporarily.
- IRA Compliance. All purchases must flow directly from your IRA, not your personal account, and all documents (bid confirmations, certificates, payment receipts) should reflect your IRA as the buyer (e.g., MidAtlantic IRA, LLC FBO [Your Name] IRA).
Common Pitfalls to Avoid
Even experienced investors can run into issues when combining tax lien investing with a retirement account. Here are the red flags we see most often:
❌ Using Personal Funds or Commingling. All expenses, fees, and redemptions must go through your IRA. If you use personal funds, even temporarily, it can trigger a prohibited transaction risking the tax-advantaged status of your entire account.
❌ Bidding Before IRA Funds Are Ready. County auctions often require quick payment. Plan ahead to ensure your IRA is funded and liquid before auction day.
❌ Overbidding for Interest Rate. High competition can drive investors to overpay, reducing yields. Remember, your goal is steady, secured returns, not speculative property ownership.
❌ Poor Recordkeeping. Every lien purchase, redemption, and foreclosure step must be properly documented for year-end reporting. Missing paperwork can complicate Fair Market Valuations (FMVs) and slow down distributions.
What We Discussed in the Client Strategy Group
During this month’s session, we explored real examples of investors who’ve built tax lien portfolios within their IRAs, along with lessons learned:
- The importance of batching research before auction season.
- How to structure partnerships carefully, ensuring other investors are not disqualified persons.
- Why it’s essential to verify county redemption procedures before bidding.
- And how one investor earned 12% interest annually on a series of residential liens, fully redeemed within 24 months, all inside their Roth IRA.
These case studies showed that when managed carefully, tax lien investing can provide predictable, consistent income streams with limited volatility.
Maintaining Compliance After Purchase
Once you’ve acquired liens, it’s not a “set it and forget it” process. Keep your account in good standing by:
- Tracking redemption updates and ensuring payments are directed back to your IRA.
- Recording FMV values annually, even for liens that haven’t redeemed yet.
- Maintaining clear audit trails for each transaction – certificates, payments, and communications.
Your custodian or administrator can guide you on how to properly document these within your IRA, but ultimate due diligence and monitoring fall to you as the investor.
Continue the Conversation
Tax lien investing rewards preparation and patience, especially inside a retirement account. If you’d like to explore advanced strategies or discuss your experience from this month’s Strategy Group, we invite you to join the follow-up Q&A session or reach out directly to our team.
Disclaimer: MidAtlantic IRA, LLC does not provide investment, tax, or legal advice. All investments carry risk, and individuals should consult appropriate professionals before making any investment decisions.