Another investment alternative for fully self-directed retirement accounts involves the IRA or 401(k) lending money to third party individuals or entities.
The Borrower can be anyone that is not considered a “disqualified person” by IRS rules. The IRA Holder (and his/her spouse), certain family members and controlled entities are defined as “disqualified persons” under the Code and dealings between the IRA and such persons may be deemed as "Prohibited Transactions" under IRC §4975.
The private loans can be either secured or unsecured:
Secured notes: Backed by specific collateral, such as real estate, that provides the lender increased assurance that the loan amount will be repaid with interest. These are usually mortgages and deeds of trust.
Unsecured notes: Not backed by collateral, and could be a loan to a friend or a non-disqualified relative. It is often higher risk, and sometimes reward, than a secured note.
The IRA Holder determines the loan amount, interest rate, collateral, maturity date and other terms that make sense for the particular financing arrangement. One can also purchase existing notes, often at a discount over the face amount, and realize higher yields on the IRA dollars invested. The interest income will flow back to the IRA on a tax-deferred or tax-free basis without concern over debt-financed income tax exposure.
|Documents Required Prior to Funding Secured Notes||Acknowledgement|
|Documents Required Prior to Funding Unsecured Notes||Acknowledgement|