- in Investing
I've written before about why I'm leaving Lending Club.
I wanted to provide a follow-up post about the challenges of closing an account. Specifically, in addition to funding a taxable account way back when, I also opened a small IRA at Lending Club in 2013. The logic was sound: if I'm going to earn 8 percent returns, but those returns are to be taxed at ordinary income rates, better to shield that income from taxes entirely.
However, the point I want to make is that if/when you decide to move an IRA out of Lending Club, it's a tricky process.
Why? Because Lending Club's IRA custodian (Strata Trust) charges a $50 fee every time you transfer assets out (back to Vanguard for example). This means you want to make a single transfer out of Strata rather than slowly moving the money out over time. In practice, this means either you let the loans slowly run off or you have to sell the loans on Lending Club's secondary market.
Well, if you let the loans run off, you may be sitting with IRA money in cash for as long as five years if you recently purchased loans. Letting IRA money sit as idle cash not even earning basic interest is a bad idea for obvious reasons. On the other hand, selling on the secondary market is quite a tedious process of selling hundreds and hundreds of loans--and will likely drive down your overall returns as you will have to sell the notes at a discount.
In addition to hurting my returns, closing the account has probably taken me at least 40 hours of work. Figuring out how to sell the notes, then selling them, then filling out multiple forms to get the IRA transferred, calling LC and Vanguard, etc. etc. etc. This just took a ton of work to get the IRA out of there!
Simplicity And Liquidity Are Valuable
My point is simply this: be aware that if you open and fund an IRA at Lending Club and then decide to leave, this could prove to be quite a complicated process (with significant financial opportunity costs). By the way, I will say that dealing with the customer service agents at Strata Trust was a real pleasure. They were helpful, knowledgeable, and quite prompt in my dealings with them.
More broadly, the fact that IRA assets at Lending Club or other peer-to-peer investment networks should give you pause. Liquidity has value. When you lock your money up for long periods of time with hundreds of small loans, you have created a sticky, complicated situation that will eat up a ton of your time should you ever want to leave......