I Finally Filled Up My Lending Club Roth IRA
It seems like years ago that I wrote my two part series on opening a Lending Club Roth IRA and how to invest it. It was actually only 5 months ago, but it marked my first major investment into peer to peer lending. I was convinced to make a larger investment because my experimental account of $500 was still above 10% returns after two years. That gave me the confidence to put $5,000 into my LC Roth IRA for 2013 with another $5k on the way next year(in 2014).
Even though I happily opened my Lending Club Roth IRA, I still think $10,000 is a lot of money to invest in an unproven and relatively new investment. We know that the return is there, but it’s tough to tell just how risky the investment is since there isn’t much historical data on peer to peer loans. But I think a lot of that uncertainty is what drives the returns up so high: people are afraid of the unknown.
It’s up to investors like me to go in and capitalize on a favorable risk-return rate.
Why’d it Take So Long to Fill Up My Portfolio?
Lending Club’s popularity has been growing exponentially over the past couple of years. It’s very hard to find notes that match my filters without logging in at the specific times when they release notes(6 am, 10 am, 2pm, 6pm PST). I set a simple daily reminder at 10:02 am to log on to Lending Club and check for new notes though. On most days, I find in-between 1-3 notes that match my criteria so I go ahead and invest.
This is one of my only complaints with Lending Club right now. There’s no way to automate the investment process so it can be a little time consuming for individual investors. If I wanted to invest more than $10k I’d probably have to widen my filters to encompass more notes(possibly lowering my return though).
Using my once a day strategy though, I filled up my portfolio in about 5 months. Going forward, I will probably only need to logon 1-2 times a week to re-invest my dividends if I decide not to cash them out. I didn’t want filling up my LC portfolio to consume my life but I could have set reminders four times a day and filled up my portfolio in a month or two if I wanted to.
Planning For the Future
Even though I’m young and very open to risk, I don’t see Lending Club as that risky of an investment. Like I said, I don’t think the market has caught up yet in terms of its risk so that’s why I don’t mind putting in $10,000.
Investing in a Roth IRA is the perfect vehicle for Lending Club notes in my mind too. Once I have enough money in my Lending Club IRA, I can start withdrawing the monthly returns as tax free dividends.
Since you’re allowed to withdraw your contributions from a Roth IRA at any time tax free, I would be able to use my returns as a source of tax free income. Here’s what I mean.
Let’s say I contribute $5k in 2013 and $5k in 2014. Assuming my portfolio is completely full by 2015 and I’m earning a 10% return, I can withdraw my $1,000 in interest each year for 10 years completely tax free.
It’s kind of like investing in a high paying CD(albeit with way more risk) but not having to pay taxes on any of the returns. Since I have already made $20k in Roth IRA contributions from 2009-2012, that would give me another 20 years of tax free returns.
I keep on telling anyone and everyone who will listen what a great investment Lending Club is. There’s definitely risk but it’s nice to have a second or third source of income that isn’t related to stocks, bonds, or the real estate market.
Readers, what do you think about opening a LC IRA? Do you think it’s worth the daily hassle to fill up a portfolio or am I right on the money with what I’m doing?
-Harry @ PF ProTags: Lending Club, Risk-Return, Roth IRA, Second Source of Income, Tax Free