Private lending is one of the more straightforward investment strategies available to a self-directed plan. Your plan acts as the lender, a borrower receives capital, and the note documents the terms of repayment. With checkbook control, you can fund loans directly and receive payments into the plan account without custodian delays or per-transaction fees.
Your IRA LLC, IRA Trust, or Solo 401(k) trust is the lender on every note. The note must be drawn in the entity's name, not your personal name. You execute the note on behalf of the plan in your role as manager or trustee.
The plan funds the loan from the entity bank account. All principal and interest payments are received back into that same account. Standard money flow rules apply throughout the life of the note.
A well-constructed promissory note addresses the following:
| Term | Description |
|---|---|
| Lender | Full legal name of your plan entity |
| Borrower | Full legal name of the borrowing party |
| Principal amount | The loan amount |
| Interest rate | Fixed or variable rate; must comply with state usury laws |
| Repayment schedule | Monthly, quarterly, interest-only, or balloon payment structure |
| Maturity date | Date by which the loan must be fully repaid |
| Default provisions | What constitutes default and the lender's remedies |
| Security | Description of collateral pledged, if any |
There is considerable flexibility on terms: interest rate, repayment structure, and maturity date are negotiated between your plan and the borrower. The note must comply with the lending laws of the state where the loan is made, including any applicable usury limits and required borrower disclosures. Consult a licensed attorney or note servicer familiar with your state's requirements.
It is strongly recommended that a licensed attorney or note servicer draft or review note documents, particularly for larger loans or when the collateral is real property. A properly drafted note is enforceable; a deficient one may not be. The cost of professional document preparation must be paid from plan funds.
If the note is secured by real property, record the deed of trust or mortgage with the county recorder's office in the jurisdiction where the property is located. Recording creates a public record of your plan's lien and establishes priority against other creditors. Without a recorded lien, your plan's claim against the collateral may not be enforceable if the borrower defaults, goes through bankruptcy, or has other creditors.
Recording should occur promptly after funding; do not leave this step incomplete.
Wire, ACH, or cashier's check from the plan entity account are all acceptable funding methods. Payments from the borrower (principal and interest) must be remitted to the plan entity. Do not accept payments personally or into a personal account. If a note servicer is collecting payments, confirm that remittances flow to the plan entity account, not to you.
Two compliance rules apply to every lending transaction:
Can my plan charge any interest rate it chooses?
Yes, within reason. State usury laws cap the maximum interest rate a private lender may charge. Below-market rates are permissible but may warrant scrutiny if the borrower is close to, but not technically, a disqualified person. A loan considerably below market rates could violate the IRS Exclusive Benefit rule if it is not in the best interest of the plan, regardless of who the borrower is. Arm's-length terms consistent with the market are always advisable.
What happens if the borrower defaults?
Your plan has the same remedies as any lender. For secured notes, the plan can initiate foreclosure proceedings against the collateral. For unsecured notes, remedies are limited to legal action against the borrower. A note servicer can assist with the default process and help ensure compliance with state foreclosure law.
This information is provided for educational purposes only and should not be interpreted as tax, legal, or investment advice. Readers are encouraged to consult a qualified professional who can offer guidance based on their personal situation.