INVESTMENT GUIDE
Private
Lending
Satisfy demand for capital for those looking beyond banks by originating loans with your self-directed account.
Your account can lend money to individuals and businesses or purchase portions of existing loans through third-party platforms.
Table of Contents
AT A GLANCE
What Should You Know About Private Lending?
Self-directed IRA lending allows your IRA to loan money to non-disqualified persons/entities. The IRA receives principal and interest, similar to a bank. The IRA holder chooses the borrower, principal amount, interest rate, length of the term and payment frequency. The account holder also decides whether or not the note is secured by collateral. Your IRA can also purchase existing notes as assets for the account. NDTCO will not fund transactions with interest rates less than 2%, as it could be perceived as a gift loan.
Since the inception of IRAs, it has been possible for these accounts to participate in lending. However, it has not always been easy to find a self-directed IRA provider who allows IRA lending investments. Here at New Direction Trust Company, we make investing in Private Lending easy.
The IRS requires an authorized IRA provider for all IRAs. New Direction Trust Company (NDTCO) provides services for all types of IRA lending. The IRA account holder handles the investment strategy and negotiation. Then, NDTCO is instructed by the account holder to send money from the IRA to fund the loan. We make sure the paperwork substantiates the loan, is an investment made by your IRA, and deserves the tax benefits associated with the account type.
Possible Structures
Your account can lend money to individuals and businesses or purchase existing loans through third-party platforms.
- Individual Loans
- Business Startup Loans
- Business Capital Infusion
- Purchase of Existing Loans
Collateral & Cash Flow
COLLATERAL
The IRA holder chooses the borrower and negotiates the specifics of the loan. One of the key decisions is whether to attach collateral to the loan. The IRS allows the IRA holder to decide whether or not the loan will be secured by collateral and, if so, what the collateral will be. Not all loans require collateral, and leaving a note unsecured is a decision that falls upon the account holder. If a client chooses a secured loan, it is the client’s responsibility to record any associated Deed of Trust and then file the release of Deed of Trust once the loan is paid off.
Due diligence on the borrower is the task of the IRA holder. Considerations during the due diligence process may include making sure the borrower is in a position to pay the loan off or making certain the loan document gives the IRA a clear path to the collateral in the event of default.
CASH FLOW
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. The payment can be applied to interest, principle or both, as long as there is at least one annual payment.
Keep in mind the lender is your IRA; all loan payments, principal and interest, flow directly back to the IRA, not into your personal accounts. Once the payment has been received by your IRA, you decide what to do with that money: reinvest it, leave it in a cash position, etc.
Due Diligence
As the IRA holder, you are responsible for performing due diligence on your IRA’s investments. Neither the IRS nor NDTCO researches or endorses the investments, businesses, or principals involved in your IRA’s transactions. A competent professional in the legal, financial advice or accounting fields can also be engaged if you need additional help deciding if the investment being considered is legitimate, meets your risk tolerance, and is right for your investment goals.
New Direction Trust Company reviews the note to ensure it contains the required content, however it is your responsibility to create, monitor and execute the terms and conditions of the note.
Disqualified Persons
All IRAs have a list of people who are disqualified from certain interactions with that account (called Prohibited Transactions). Below is a graphic that depicts related persons that are considered to be “disqualified” by the IRS. Keep in mind that any entity that is owned or controlled by a Disqualified Person or combination of Disqualified Persons may also be disqualified. Your IRA cannot make a loan to yourself or any Disqualified Person or entity. Visit this page for everything you need to know about disqualified persons or prohibited transactions.
NON-DISQUALIFIED PERSONS INCLUDE:
- Brother
- Sister
- Brother-in-law
- Sister-in-law
- Niece
- Nephew
- Aunt
- Uncle
- Cousin
DISQUALIFIED PERSONS & ENTITIES INCLUDE:
- The account holder (you)
- The account holder’s linear ascendants (parents, grandparents, etc.)
- The account holder’s linear descendants (children, grandchildren, etc.) and their spouses
- Fiduciaries to the account (accountants, financial advisors, attorneys, etc.)
- Tax-advantaged savings accounts held by any of the aforementioned individuals
- Businesses or entities owned or controlled by any of the aforementioned individuals
Additionally, you cannot receive the note payments or interest personally, they must come to the account. You cannot lend the money to a disqualified person or entity. You can learn more about Prohibited Transactions here.
Fees
ANNUAL ADMINISTRATION FEES
(Assessed and billed annually per asset)| Private Lending Assets | $390 per asset |
PROCESSING FEES
| Purchase, Sale, or Exchange | $95 |
| Express Processing | $300 |
OUTGOING MOVEMENT OF FUNDS
Due when funds leave your account| ACH | $0 |
| Check | $20 |
| Cashier or Official Bank Check | $35 |
| Wire | $35 |
| International Wire | $35 |
| Overnight Mail | $50 |
| Returned Item or Stop Payment Request | $50 |
TRANSFERS OUT AND DISTRIBUTIONS
| Partial (no minimum, maximum of $275) | .5% of value |
| Full ($100 minimum, maximum of $275) | .5% of value |
| In-Kind Asset Registration | $50 |
- Annual Administration fees are charged based upon the custodial services provided and are not dependent upon an investment’s performance. Thus, Administration fees are non-refundable regardless of whether the client is unable to generate profits or returns.
PRIVATE LENDING
The Investment Process
The Investment Timeline
STEP 1
Open Account Online
1 business day
STEP 2
Fund the account
1-4 weeks
STEP 3
Find Investment & Due Diligence
Timeline varies
STEP 4
Assemble Documents
Timeline varies
STEP 5
Investment Funding
3 business days
- Please note this is only a potential and predicted timeline. Actual timeline may vary depending on various factors.
Assemble Documents
After you have found a borrower, you negotiate the terms of the note and prepare the loan documents. NDTCO does not assist in this process.
- New Direction Trust Company does not provide loan document templates or verify verbiage of the document. Outside parties like attorneys and title companies can be used to prepare the note.
- An Interested Party Designation (IPD) form is required for New Direction Trust Company to work with and communicate with outside parties preparing the loan.
In order to submit your Promissory Note Buy Direction Letter you will need to ensure you have sufficient cash in the account. If at the time of a purchase you don’t have sufficient cash in the account, consider a transfer-in, Rollover, Liquidation or contribution to fund the account before your purchase. If you are working with us already on a sale or funding request, check your account daily for incoming funds. As soon as funds clear in your account, you will be able to submit your purchase request.
Required Documents
Paperwork Required if NOT using a third-party for funding the loan
- Promissory Note Buy Direction Letter
- Wire instructions if funding via wire
- Borrower’s Acknowledgement Letter form signed by borrower
- Borrower’s Acknowledgement Letter is sent to your borrower at the email address you provide when completing your Promissory Note Buy Direction letter.
- A copy of the note, with the borrower’s wet ink signature and signed by the IRA holder as “read and approved”
- Amortization schedule if applicable
Paperwork Required if using a third-party (such as a title company or lawyer) for fulfillment of loan
- Promissory Note Buy Direction Letter
- A copy of the note, with the borrower’s wet ink signature and signed by the IRA holder as “read and approved”
- Amortization schedule if payments are amortized
- A copy of the security document signed by the IRA as “read and approved. Although NDTCO does not require security documents to be recorded with the county, we strongly recommend it. Security documents should be recorded prior to sending copies to NDTCO.
- Borrower’s Acknowledgement Letter form is sent to your borrower at the email address you provide when completing your Promissory Note Buy Direction letter.
Electronically signed, or scanned copies of notes with wet signatures, will be accepted as original documents. Copies of all signed documents for the transaction can be uploaded to NDTCO while completing your online Buy Direction Letter or through your client portal in the messaging center.
Please note, NDTCO does not hold hard copies of original notes. If original documents are mailed to NDTCO, we will mail the original documents back to the client and charge a $50 fee.
Once the funding has been completed, the title company or lawyer should send the completed documents to the client, who will then upload them to the client portal.
Titling Instructions/Lender Information Requirements for Notes
The promissory note should contain the following items:
- Interest rate
- Maturity date
- Principal amount
- Repayment terms
- Lender name (NDTCO as custodian FBO Client’s Name, IRA)
- Lender’s signature line left blank, we need your signature as “Read and Approved” in the margins
- Lender’s Address, if included (New Direction Trust Company, 1070 West Century Drive, Louisville, CO 80027)
- Lender’s TIN, if included (20-0157510)
- Borrower name with wet ink signature
- Borrower’s wire instructions or check delivery instructions
PRIVATE LENDING
After the Purchase
Loan Maintenance
NDTCO does not act as a loan servicer, it is the responsibility of the client to keep records of the payments, both principle and interest, for the loan.
The borrower needs to ensure that all principal and interest payments go directly back to your retirement account, not to your personal bank account. The borrower must make at least one payment per year. Borrowers can make payments back to your retirement account through the following options.
Note Payments Online
Your IRA’s borrowers have the option to make note payments online via ACH at portal.ndtco.com and it’s FREE! All they need to do is click the “Pay Now” button and fill out a few simple fields.
Incoming funds will have a 5-business day hold before the funds are available in your account.
Checks Mailed to NDTCO
Instruct your renters to make the rent checks payable to your IRA as follows: NDTCO, as Custodian, FBO Client’s Name IRA.
We cannot deposit any check payments into your IRA that are made payable to you personally, any such checks will be returned to the borrower. All checks need to be accompanied by a deposit coupon.
There is a 5-business day hold on incoming checks beginning on the date of deposit.
Checks can be mailed with the deposit coupon to our office:
New Direction Trust Company
1070 W. Century Drive.
Louisville, CO 80027
Automatic ACH Withdrawals
You have the option to set up automatic note payments with your borrower using the Authorization Agreement for Direct Withdrawals form.
Once the loan is repaid in full, you will need to cancel automatic ACH withdrawals by completing the form again.
Please note, if a note is approaching maturity you should work to amend or extend the note. The following section provides details on the items needed for note amendments, extensions and modifications.
Note Amendment: Extensions and Modifications
Please see the following items below needed for note amendments, extensions, and modifications.
- Note Amendment, Extension and Modification Form-Required for amending existing notes, whether it is extending the maturity date or adding additional funds to note.
- A copy of the note amendment
- The amendment must reference the existing note and terms, detail the changes being made to the note, state that it either replaces or adds to the existing note, and must be signed by the client as “read and approved.” The new note or note amendment must be signed by the borrower as well.
- Borrower’s Acknowledgement Letter – Is necessary when the note is amended or extended. The borrower’s acknowledgement letter be signed by the borrower.
If additional funds need to be sent to the borrower, we will need a Promissory Note Buy Direction Letter completed.
If the security on the note is changing, the following items will also be needed.
- For adding security to the note (i.e., adding a deed of trust), we require:
- A copy of the signed, original security instrument.
- If using a title company, a copy of the above is sufficient.
- This will need to be signed by the IRA holder as “read and approved.”
- The new Deed of Trust will need to be recorded to the county by the client.
- For removing security from the note (i.e., release of deed of trust), we require:
- The release instrument.
- This will need to be signed by the IRA holder as “read and approved”.
- The client must provide a written statement requesting the original security instrument be mailed to the borrower or the title company as well as any other instructions.
- Original Document Release Form– This form is needed to authorize and instruct NDTCO where to send the specified original document, as well as any other instructions.
- The release of Deed of Trust is recorded at the county by the client or their agent, not NDTCO.
- For exchanging security on the note, both of the above must be provided, in addition to the Note Amendment, Extension, and Modification Form, and a copy of the note amendment.
Paying off a Loan
PAYING OFF A SECURED LOAN
When the loan is ready to be repaid in full, please complete a Payoff Statement from your Client Portal Overview page, under the “take action” button.
- A payoff statement must be completed when the final payment for the note is received so that the note can be removed from your account in a timely fashion.
- You are responsible for providing the release of the Deed of Trust. Coordination with outside third-parties such as a Mortgage Company or Lender, Attorney, or Title Company is your responsibility. In order to release the asset, NDTCO will need to sign the Deed of Trust after you have marked it, Read and Approved.
The final payment needs to come to NDTCO. We need both the Payoff statement and the payment before we can remove the asset. Any asset in the account at the time of annual billing will be assessed an annual administration fee. Annual administration fees are not refundable or pro-rated.
PAYING OFF AN UNSECURED LOAN
When the loan is ready to be repaid in full, please complete a Payoff Statement from your Client Portal Overview page, under the “take action” button.
- A payoff statement must be completed when the final payment for the note is received so that the note can be removed from your account in a timely fashion.
- The final payment will not be deposited into the IRA holder’s account until New Direction Trust Company has a payoff statement.
The final payment needs to come to NDTCO. We need both the Payoff statement and the payment before we can remove the asset. Any asset in the account at the time of annual billing will be assessed an annual administration fee. Annual administration fees are not refundable or pro-rated.
Defaulted and Uncollectable Loans
If payments have stopped, contact the borrower. If the borrower does not comply with the loan terms, New Direction Trust Company strongly recommends that you seek legal counsel. NDTCO is not a loan servicer and will not contact our clients or the borrowers if payments have stopped or changed. NDTCO does not work on our client’s behalf to uphold the terms of the agreement between our Client and the borrower.
If funds are deemed uncollectable, the loan will become a zero-value asset. In order to adjust the asset value to zero and remove it from the account, New Direction Trust Company will need:
- Proof that the investment is worthless – Documentation to prove the asset is valueless can come from the borrower, third-party (attorney or CPA), or public document.
- Zero Value Distribution Form. This can be found after logging into the client portal by clicking on Take Action to right of the asset name and then choosing Valuate. This online form will allow you to attach your supporting documentation.
Once the above documents have been received and reviewed, New Direction Trust Company can remove the zero-value asset from your IRA.
Prohibited Transactions
The following actions are considered prohibited transactions and could result in the distribution of this asset from your plan. Prohibited transactions apply to all disqualified persons to your plan.
- Receive loan payments directly instead of having them go to the IRA
- Engaging in private lending between your account and a disqualified person
- Yield a commission/fee for the purchase, sale, or exchange of assets
- Cover account expenses with personal, non-account funds
- Use of your IRA’s assets as collateral for a personal loan
- Use of your IRA’s assets to guarantee credit for a loan
All expenses for the investment are the IRA’s responsibility. Never pay any bills with personal funds. Such payments may be considered prohibited transactions, which could jeopardize the tax-advantaged status of your IRA.
Annual Fair Market Valuation
Per IRS regulations, each retirement account must be valued annually. Once per year, NDTCO accounts that hold promissory notes must complete a Fair Market Valuation (FMV).
Supporting documentation from a qualified 3rd party or based on the note’s amortization schedule is required for the valuation to be processed. 3rd Party documentation may include a letter from the borrower, a CPA, an attorney, or a public document.
Supporting documents not accepted: Schedule K-1s (which report annual earnings or losses but not fair market values), documents older than 6 months from creation date, recorded phone conversations, or e-mails do not constitute valid supporting documentation.
Failure to provide an annual valuation may result in the taxable distribution of your asset. Accounts that have shown no activity, including the valuation, will not be held by NDTCO because we cannot meet the IRS requirement to annually update the value of your IRA and file an accurate IRS Form 5498 for your account.
To complete a Fair Market Valuation Form, please:
- Log into the NDTCO Client Portal.
- On the Overview page, find the appropriate asset and select Take Action in the right-hand column, and then choose Valuate.
- Provide any requested information and upload your supporting documentation.
- Agree to the Terms & Conditions and click Submit. Done!
In-Kind Distribution
To take a full in-kind distribution of Private Debt, the following items are needed:
- Distribution and Notice of Withholding Form – this can be completed through your client portal. To access the form login to your client portal and select ‘Distributions’ from the left-hand options. Complete the section for in-kind distributions.
- A copy of the new note (with the borrower’s signature and the client’s read and approved) showing your name as the new lender instead of the IRA’s naming convention.
- Fair Market Valuation (FMV) will need to be completed with documentation submitted within the past year prior to the distribution. The FMV requirement is waived if the asset was purchased by your account within the past year prior to the distribution.
To take a partial in-kind distribution of Private Debt, the following items are needed:
- Distribution and Notice of Withholding Form – this can be completed through your client portal. To access the form login to your client portal and select ‘Distributions’ from the left-hand options. Complete the section for in-kind distributions.
- Note Amendment, Extension and Modification Form-Required for amending existing notes, outlining the changes for the portion of the note that will be staying in the NDTCO account.
- A copy of the note amendment
- The amendment must reference the existing note and terms, detail the changes being made to the note, state that it either replaces or adds to the existing note, and must be signed by the client as “read and approved.” The new note or note amendment must be signed by the borrower as well.
- If applicable, the new Deed of Trust will need to be recorded at the county by the client or their agent, not NDTCO.
In-kind distributions will incur both a distribution fee (unless the client is taking an RMD) and an in-kind asset re-registration fee. Please refer to our fee schedule for details.
In-Kind distributions are reported as income on tax form 1099, please seek counsel from a qualified tax professional if you have any questions about the form or how to report it with your taxes.
Unrelated Debt-Financed Income (UDFI/UBIT)
Earnings from some investments may be subject to Unrelated Business Income Tax. If your investment’s entity has earnings from the sale of goods/services or earnings from debt, consult with your tax professional to determine if UBIT is owed. You, as the IRA holder, are responsible for deciding if the earnings are taxable or not. If so, you must file form 990-T with the IRS.
NDTCO does not calculate UBIT or submit form 990-T. Click here to download our free UBIT calculator.
See here for more information on UDFI, UBTI, and UBIT.
Managing Your Account
Our online client portal combines human power and digital innovation, making it simple to view all your account information in one centralized location. Within the client portal, you have the ability to directly message our support team, review recent transactions, download account documents, and review a vast library of educational content easily and securely.
Simply log into our Client Portal to access and manage all of your account information. Learn more.
Forms
Please login to the Client Portal to view forms.
- Promissory Note Buy Direction Letter – This form directs us to process the loan investment. This form can be accessed through your client portal from the Invest tab on the left-hand side.
- Note Amendment, Extension and Modification Form– The Note Amendment, Extensions and Modifications Form is required for amending existing notes, whether it is extending the maturity date or adding additional funds to note.
- Borrower’s Acknowledgement Letter –The Borrower’s Acknowledgement Letter Form is required for funding notes in your NDTCO account and must be signed by the borrower. This is sent to the borrower after completion of the Promissory Note Buy Direction Letter. The borrower’s email address is needed for delivery of this form.
- Distribution and Notice of Withholding Form– To access the form login to your client portal and select ‘Distributions’ on the lefthand side.
- Payoff Statement – This form is accessed by logging into the portal, clicking on the take action button to the right of the asset name and choosing Payoff Asset.
FAQ
Who can I not lend to?
All IRAs have a list of people who are disqualified from certain interactions with that account (called Prohibited Transactions). Keep in mind that any entity that is owned or controlled by a Disqualified Person or combination of Disqualified Persons may also be disqualified. Your IRA cannot make a loan to yourself or any Disqualified Person or entity. Visit this page for everything you need to know about disqualified persons or prohibited transactions.
Is an annual Fair Market Valuation required?
Per IRS regulations, each retirement account must be valued annually. Once per year, NDTCO accounts that hold promissory notes must complete a Fair Market Valuation (FMV). This can be done by logging into your NDTCO Client Portal, clicking on the take action button to the right of the asset name in the Overview page and then choosing valuate.
For additional information, please reference the above section ‘Annual Fair Market Valuation’.
How does a borrower deposit money into my IRA?
The borrower needs to ensure that all principal and interest payments go directly back to your retirement account, not to your personal bank account. Please review the above section Loan Maintenance for the following options.
When the unsecured loan is ready to be repaid in full, what action is needed?
When the loan is ready to be repaid in full, please complete a Payoff Statement from your Client Portal Overview page, under the “take action” button.
- A payoff statement must be completed when the final payment for the note is received so that the note can be removed from your account in a timely fashion.
- The final payment will not be deposited into the IRA holder’s account until New Direction Trust Company has a payoff statement.
The final payment needs to come to NDTCO. We need both the Payoff statement and the payment before we can remove the asset. Any asset in the account at the time of annual billing will be assessed an annual administration fee. Annual administration fees are not refundable or pro-rated.
Am I required to attach collateral to the loan?
The IRA holder chooses the borrower and negotiates the specifics of the loan. One of the key decisions is whether to attach collateral to the loan. The IRS allows the IRA holder to decide whether or not the loan will be secured by collateral and, if so, what the collateral will be. Not all loans require collateral, and leaving a note unsecured is a decision that falls upon the account holder. If a client chooses a secured loan, it is the client’s responsibility to record any associated Deed of Trust and then file the release of Deed of Trust once the loan is paid off.
Due diligence on the borrower is the task of the IRA holder. Considerations during the due diligence process may include making sure the borrower is in a position to pay the loan off or making certain the loan document gives the IRA a clear path to the collateral in the event of default.
OTHER INVESTMENTS
The world is your portfolio
Why stop at precious metals? With a self-directed account, you have the freedom to invest your tax-advantaged retirement or savings funds in the assets you’re most passionate about.
From start-ups to small businesses, if you can find it, we will help you fund it.
EDUCATION CENTER
Want to learn more about Private Lending investments?
Private Lending Guide
