Private credit & promissory notes

What it is

Here the IRA is the lender. It can hold promissory notes, mortgage notes secured by real property, or interests in private-credit funds — earning interest income rather than equity upside.

Holding it in a self-directed IRA

The note names the IRA as the payee, and all principal and interest payments return to the IRA. For a secured note, the collateral is documented in the IRA’s favor. The custodian holds the note and processes payments and payoffs you direct.

Requirements

The note is documented in the IRA’s name, with payments made to the IRA.
Terms are arm’s-length — a market rate, a stated maturity, and a repayment schedule.
For secured lending, collateral (such as a deed of trust) is recorded in the IRA’s favor.

Limitations and prohibitions

The IRA cannot lend to disqualified persons — you, close family, or entities you control — which is a prohibited transaction under IRC § 4975.
Unsecured notes carry default risk with limited recovery to the account.
Servicing, collection, and any workout are the account’s responsibility, handled through the custodian.
A note held through a debt-financed vehicle can generate UBIT/UDFI.

Valuation and liquidity

Notes are carried at outstanding principal, adjusted for any impairment, and are illiquid — there is generally no secondary market, so the account holds to maturity or payoff.

Tax considerations

Interest paid to the IRA compounds without current tax; the main risks are credit and concentration, not taxation — diversify and document every note at arm’s length.

A worked example

Your IRA lends $40,000 as a note secured by real estate at 9% for three years. The borrower — who must not be a disqualified person — pays principal and interest to the IRA, and the interest compounds untaxed.

IRS forms & records

Form 5498 — fair-market value (outstanding principal, adjusted for impairment).
Form 1099-R — distributions from the IRA.

Common mistakes that can cost you

Lending to yourself, family, or an entity you control — a prohibited transaction.
Undocumented terms, or a below-market rate that isn’t arm’s-length.
Unsecured lending with no realistic recovery plan.
Servicing or collecting the note personally in a way that self-deals.

Before you invest

The borrower is not a disqualified person.
The note is documented at arm’s length, with a rate and maturity.
Collateral (e.g., a deed of trust) is recorded in the IRA’s favor.
Servicing runs through the custodian.

Authorities

IRC § 4975(c)(1)(B) — loans and extensions of credit as prohibited transactions.
IRC § 4975(e)(2) — definition of disqualified persons.

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