Self-Directed Solo 401k Promissory Note Investment Procedure
You can invest your Solo 401k funds in promissory note investments to an unrelated person. Some of the criteria entails charging the borrower an interest rate that will benefit the solo 401k plan. A conservative approach would be to charge the borrower an interest rate based on his/her credit score and a rate that a bank would charge the borrower.
Compose promissory note
The promissory note document must list loan/principal amount, interest rate, when note is due (maturity date), and guidelines for dealing with possible loan default.
As trustee of Solo 401k plan, name the Solo 401k as the lender.
Example: Jane Do, Trustee of ABC Solo 401k Trust
Compose Promissory Note payment/amortization schedule
To track the note/loan payments by borrower to the solo 401k, draft an amortization payment schedule.
Recording of asset securing note
As trustee of the Solo 401k plan, the responsibility of properly recording the asset securing the loan falls on you or your loan servicing agent.
Typical documents securing note to a business entity
Operating agreement for LLC; Partnership agreement for LP; List of shareholders for C-Corp
To help validate that the entity is in good standing, a printout from the Secretary of State confirming state where entity is registered should be reviewed and confirmed.
Typical documents securing note to an individual
Trust deed/mortgage listing the Solo 401k as beneficiary.
For Example: Jane Do, Trustee of ABC Solo 401k Trust
After funding the note investment
Unless you hire a loan servicing agent, as trustee of the Solo 401k, you will be responsible for not only preparing the note document, but also recording the deed of trust/mortgage and for safekeeping deed instrument.
You should use the solo 401k plan’s address as the return address for the county recorder’s office on the deed.
All promissory note payments must flow back to the Solo 401k plan checking account in order to maintain its tax deferred/sheltered status.
Click here to read our blog about investing in promissory notes.
This information is for informational purposes. For information specific to your investment situation, MySolo401k.net recommends consulting with a qualified tax advisor, CPA, financial planner or investment manager. MySolo401k.net is 401k provider; therefore, it does not offer investment or tax advice, nor sell investments.