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Using a Self Directed IRA to Buy Notes in 5 Steps

5 Steps to using a Self Directed ITA to Buy Notes

Using a Self directed IRA to buy notes have become a popular investment options for many retirement account investors.

What is a Self Directed IRA?

A self-directed IRA is not a term of art and you will not find it anywhere in the Internal Revenue Code.  A self-directed IRA simply refers to an IRA account which is permitted to be invested in traditional assets, such as stocks, but also alternative assets, such as real estate or even cryptocurrencies.  In the last several years, the number of self-directed IRA accounts has grown significantly.

What is Note Loan?

A note is a type of contract whereby the lender and the borrower’s obligations are stated in the actual terms of that loan. Should these not be followed, the parties have a right to sue the other. For many self directed IRA investors in 2018, note loans have been seen as an attractive investment option for generating strong returns in a tax-deferred or tax-free manner, in the case of a self directed Roth IRA.

No Tax on Interest Earned When Using a Self-Directed IRA to Buy Notes

The best part of using a self-directed IRA to invest in notes is that you get to invest in what you know and understand.  In addition, self-directed IRAs are often considered a valuable diversification option and hedge against inflation.  Moreover, the interest generated from the note loan would flow back to the self directed IRA without tax.

In general, note loans can either be secured or unsecured.  When using a self directed IRA to invest in note loans it is critical that the borrower not be a “disqualified person.”  A “disqualified person” is essentially defined as the IRA holder and any of his or her lineal descendants, as well as any entities controlled by such persons.  In other words, one cannot use a self directed IRA to buy notes to lineal descendant or an entity associated with a “disqualified person.”

5 Steps to Using a Self directed IRA to buy notes

Below is a step-by-step breakdown of how one can use a self-directed IRA or checkbook control IRA to make a loan  to a non-disqualified person or invest in a note loan:

  1. Establish self-directed IRA with an IRA custodian or trust company that allows for alternative asset investments, such as IRA Financial Trust. Transfer or Rollover your retirement assets that you will be using for investment tax-free to the new IRA custodian.
  2. In the case of a checkbook control self-directed IRA solution, a special purpose LLC will be established that will be wholly owned by the IRA.  One is not required to establish an LLC to invest in note loans.  The IRA custodian can transfer the funds to the borrower on behalf of the IRA, however, using the LLC will likely cut down on annual IRA custodian transaction fees.
  3. Establish a bank account for your LLC.  You will need to have the LLC article of formation, a Tax ID#, as well as a self-directed IRA LLC operating agreement.
  4. Notify the IRA custodian that you wish to have the funds sent to the newly established LLC bank account.  The IRA assets/cash will then be transferred to the LLC tax-free in exchange for 100% interest in the LLC.  Alternatively, if an LLC is not used, the IRA custodian would transfer the funds to the borrower on behalf of the LLC.
  5. You as manager of the LLC will then have checkbook control over all the assets/funds in the IRA LLC and will have the authority to send the funds to the borrower as part of using your self directed IRA to buy notes.  You have the option of having the loan secured or not.  Based off the terms of the loan, the borrower would send the interest and principal payments back to the LLC or the IRA custodian directly if an LLC is not used.

To learn more about how to use a Self directed IRA to buy notes, please contact a self-directed IRA Expert at 800-472-0646 or visit www.irafinancialgroup.com.

Checkbook Control, Self Directed IRA, Self Directed IRA Investments

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