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

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

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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