Key takeaways
- A promissory note turns the account into the bank, which makes the terms your only real protection.
- The borrower cannot be you or a family member, and servicing the note is part of the job rather than an afterthought.
- The note still needs an annual value, adjusted for any impairment, not just its face amount.
A self-directed IRA can lend money — to a real-estate flipper, a small business, an individual — documented by a promissory note the account owns. Notes appeal for good reasons: contractual income, defined terms, and, when secured, collateral behind the promise. The discipline is in underwriting like a lender rather than investing like a fan.
Terms are your only protection
Everything you’ll ever enforce lives in the paper: principal, rate, payment schedule, maturity, what constitutes default, and the cure period. Secured notes add a recorded lien — a deed of trust or mortgage on real property, a UCC filing on business assets. Unsecured notes are a handshake with interest; price them accordingly or decline them.
The borrower cannot be family — or you
Prohibited-transaction rules bar lending to yourself, your spouse, ancestors, descendants, and entities they control. The rules are unforgiving, and “I didn’t know he counted” is not a defense. Screen every borrower through the disqualified-person rules first.
Servicing is part of the job
Payments flow to the IRA — never to you personally. Track them. A borrower who goes quiet is a lender’s problem to manage: notices, workout terms, or foreclosure on collateral, all executed through the account. Decide before funding who will service the note — you, directing us transaction by transaction, or a third-party servicer the account pays.
Value it every year
A performing note is generally carried at outstanding principal; a delinquent one is not. Year-end fair market value reporting must reflect reality — impairments included — and matters even more if the account faces RMDs.
The underwriting posture
Banks survive by assuming some loans go bad: they verify collateral values independently, keep positions small relative to the portfolio, and never lend money they can’t afford to have tied up in a workout. An IRA lender deserves the same protection from itself.
Educational only. This page is general information, not individualized investment, legal, or tax advice. Rules depend on your account type, transaction, tax year, and circumstances — consult a qualified professional.