Individual Retirement Accounts (IRAs) can invest in promissory notes and private lending—opening the door to opportunities like funding real estate projects, supporting emerging businesses, and financing unique assets.
Imagine being the bank—lending money, earning interest, and building wealth—all within the tax-advantaged framework of your retirement account. With a Self-Directed IRA (SDIRA), you can go beyond traditional investments like stocks and mutual funds to explore high-value opportunities such as promissory notes and private lending. These strategies allow you to fund real estate projects, support businesses, or finance assets, giving you full control over your retirement strategy while diversifying your portfolio.
Promissory notes are legally binding agreements where borrowers promise to repay loans with interest, while private lending lets you lend money to individuals or businesses, often backed by collateral like real estate or equipment. Within an SDIRA, these investments offer unique benefits, including tax advantages and added diversification. By taking ownership of loan terms, borrowers, and collateral, you can align your investments with your financial goals and create a more dynamic retirement plan.
A Self-Directed IRA (SDIRA) is any retirement account held at a custodian who specializes in allowing alternative investments, including private loans and promissory notes. Unlike Brokerage IRAs, which are limited to stocks, ETFs, and mutual funds, SDIRAs open the door to less conventional investment opportunities. Trust companies like Directed IRA put you in the driver’s seat so that you can invest in what you know.
Why Traditional Custodians Don’t Allow These Investments
Traditional custodians, such as Fidelity or Schwab, focus on conventional investments that require less administration and oversight. Alternative assets require specialized custodial services, which Directed IRA provides. Directed IRA acts as the legally compliant custodian for SDIRAs, supporting clients in managing alternative investments while handling all necessary regulatory and reporting requirements.
1. Open & Fund Your Self-Directed IRA:
Start by opening a Self-Directed IRA account with Directed IRA and funding the account through a contribution, transfer, or rollover from an existing retirement account. Once funded, your IRA is ready to invest in private lending opportunities.
2. Find & Evaluate Your Investment:
Identify a promissory note or private lending opportunity that fits your investment goals. Before moving forward, perform thorough due diligence by reviewing the borrower, collateral, loan terms, and legal documentation to help protect your retirement investment.
3. Fund the Loan & Receive Payments:
Once the loan terms are finalized, Directed IRA facilitates funding from your IRA. As the lender, your IRA receives all principal and interest payments back into the account, allowing your retirement savings to grow according to the terms of the loan.
Want to learn more? Click here for a deeper dive into investing your IRA in promissory notes and private lending, including the 5 key considerations every investor should understand before using a Self-Directed IRA.
Most family members are restricted, and you cannot loan your Self-Directed Individual Retirement Account (SDIRA) to them as they are considered “disqualified persons.” However, you can lend to some family members. For example, your spouse, children, and parents are disqualified, and you cannot invest or lend your IRA funds to them, but your brother, sister, aunt, niece, and cousin are not disqualified, and you can lend or invest your IRA with them. Disqualified persons include direct family members such as parents, spouses, children, and their spouses, as well as entities that are directly or indirectly controlled by these individuals (50% or more). Engaging in such transactions would trigger a prohibited transaction, leading to severe penalties, including the immediate disqualification of your IRA and the entire account becoming taxable in the year of the infraction. To comply with IRS regulations, loans should only be made to qualified, unrelated parties.
Promissory notes issued from an SDIRA must be secured by tangible or intangible collateral to protect the investment. Common types of collateral include:
If the borrower fails to meet their repayment obligations, the SDIRA, as the lender, has the right to take possession of the secured collateral. The exact course of action depends on the terms outlined in the loan agreement and the type of collateral. For real estate-backed loans, this often involves initiating foreclosure proceedings, which can vary depending on the state’s foreclosure laws (judicial or non-judicial processes). For equipment or vehicles, the IRA may repossess the assets and liquidate them to recover the outstanding loan value. The value recovered will depend on the collateral’s fair market value at the time of default, which may be lower than the loan amount if the asset has depreciated. It’s critical to ensure that all processes remain compliant with IRS rules to avoid jeopardizing the SDIRA’s tax-advantaged status. The SDIRA account would be responsible for paying collection and legal fees to enforce the loan.
All profits generated from an SDIRA loan, whether interest payments or foreclosure recoveries, remain within the IRA and retain their tax-advantaged status. For Traditional IRAs, this means the income remains tax-deferred until distributions are taken, while for Roth IRAs, the income is entirely tax-free if held within the account and distributed in accordance with IRS rules after meeting qualifying conditions. However, if funds are distributed prematurely—such as through a prohibited transaction or violation of IRA rules—they may be subject to ordinary income tax and potential early withdrawal penalties. Consult a tax advisor to ensure full compliance with all applicable rules and tax implications.
New to self-directed retirement accounts? These resources are designed to help you understand the fundamentals and get started the right way.
Access curated webinars, guides, and educational content covering investment options, account structures, and the rules that govern self-directed IRAs.
Mat Sorensen, Attorney, CEO, and Founder of Directed IRA, wrote the #1 book on self-directed IRAs – selling over 50,000 copies nationwide. The Self Directed IRA Handbook is a comprehensive guide written for both investors and advisors alike. Get access to your SDIRA Handbook resources today!
Mat Sorensen, Attorney, CEO, and Founder of Directed IRA, wrote the #1 book on self-directed IRAs – selling over 50,000 copies nationwide. The Self Directed IRA Handbook is a comprehensive guide written for both investors and advisors alike. Download your free copy today!
