Investing a Self-Directed IRA in Notes Vs Investing a Solo 401k Plan in Notes

After physical real estate, investing retirement funds such as self-directed IRA and solo 401k funds in promissory notes secured by real estate (also known as trust deeds) is quite popular.

Investing in notes is especially attractive for those not looking to contend with the challenges that can arise with real estate. Challenges from making sure the property remains occupied  to actually managing the property. With note investments, the self-directed IRA or the solo 401k plan is effectively acting like a bank since the funds are loaned out to an unrelated third-party.

SIMILARITIES of Investing a Solo 401k or a Self-Directed IRA in Promissory Notes:

Since the retirement account is making the note investment, the note investment cannot be to a disqualified party such as the retirement account participant, her spouse, parents,children, grandchild, and her business, to name a few.

The promissory note can be structured as a secured or unsecured note. It is preferable to invest in notes secured by real estate in the event the borrower cannot make the note payments. In which case, the retirement account will take over the property.

When processing the funding of the promissory note, the funds have to flow from the retirement account directly to the borrower, not your personal or business bank account, as doing so would result in a taxable event.

The note investment must be documented in writing and list the retirement account as the lender (beneficiary).

A note interest rate that will benefit the retirement account must be charged while also not running afoul with the usury rules.

All note payments must be deposited directly into the retirement account not your personal bank account.

DIFFERENCES of Investing a Solo 401k or a Self-Directed IRA in Promissory Notes:

It is generally easier and less costly to invest in notes via solo 401k plan over a self-directed IRA.  For example, because the solo 401k owner is the trustee of the plan and thus manages the solo 401k bank account, she can process the funding of the note by wiring a check to the borrower from the solo 401k bank account or submit a wire directive to the bank.  On the other hand, if the investment is done through a self-directed IRA the IRA custodian will charge a transaction fee, a wire fee and an ongoing note holding fee.

When titling the note investment, the self-directed IRA custodian is listed as the lender (beneficiary) for the benefit of the IRA.  If processed through the solo 401k plan, tile is taken in your name as trustee of the solo 401k plan. Click here to learn more on how to title the note investment.

The promissory note instrument is safe-kept by the solo 401k owner. With an IRA, the self-directed IRA custodian safe-keeps the note paperwork and charges a holding fee for doing so.

The promissory note payments flow to the solo 401k bank account instead of the self-directed IRA custodian for deposit into your IRA.


About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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