Secured and Unsecured Promissory Notes: Putting your IRA to Work

A promissory note in which your IRA is the lender allows you to create terms that can be favorable to both your IRA and your borrower. One of the key benefits of promissory notes is flexibility. Although your IRA is technically the “lender”, you decide the payment schedule, the interest rate, and what happens if the borrower defaults. As the IRA holder, you are in control.

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Secured vs. Unsecured Promissory Notes

First, you determine whether to secure the note or leave it unsecured. Secured notes can be secured by the more traditional methods of mortgages or Deeds of Trust. However, stock, gold, vehicles, etc. can also be used as collateral to secure a promissory note. You should also determine what your self-directed account receives in the event your borrower defaults.

As the IRA holder, you can specify whether your account is to receive monthly, quarterly, or even annual payments. The borrower must make at least one payment per year.

You may choose to loan the funds as an interest-only note or as a fully amortized note. Be aware that the IRS and NDTCO prohibit “sweetheart loans”, meaning the interest rate charged must represent a genuine economic transaction for your IRA. We will not accept a promissory note with a zero or one percent interest rate. Conversely, usury laws prohibit a lender from charging exorbitant interest rates.

Of course, all of the same IRC 4975 rules apply for promissory notes. You may not loan funds to a prohibited person. You cannot retain the payments for yourself. No loan may be reciprocal (where the IRA lends money to an individual who then lends the money back to you).

As people seek to diversify their retirement portfolios, private notes have become viable choices among alternative investment options like real estate, private equity, and precious metals. Feel free to contact New Direction Trust Company to learn more about this intriguing asset class! You can give us a call at 877-742-1270 or send us a secure message through the Client Portal.

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