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It is possible to invest in private debt, also known as private money lending, using a self-directed IRA or other account. Equity Trust makes the process easy, but there are a few things to be aware of if you’re not familiar with lending from your retirement account.
Frequently Asked Questions About Private Money Lending in an Equity Trust Self-Directed Account
Q: What are the rules related to investing in private debt (a promissory note) using my retirement account?
A: Some important rules to remember about private money lending within your qualified account:
- You are unable to loan money to a disqualified individual (including yourself, your spouse, lineal descendants, and their spouses)
- Loans may be secured by an asset, but the asset cannot be a collectible
- Collectibles include: art, rugs, antiques, gems, stamps, coins, alcoholic beverages, and other tangible personal property
- Any income earned from the interest or repayment of the loan must return to your account
For the complete list of rules, visit IRS.gov.
Q: What are the different types of notes?
A: Notes can be structured different ways including:
- Secured note
- Has an asset pledged as collateral; collateral can be claimed to recoup the money borrowed, in the case of default
- Security for the loan can be real property, mobile homes, corporate stock, etc.
- Unsecured note
- There is no collateral to repossess in the event of default
- Draw note
- Provides the borrower funds through multiple payments, also known as draws. Draw notes may be secured or unsecured. Also commonly known as construction loans.
Your account can also purchase an existing secured or unsecured note – at face value or at a discounted price. Your account takes the place of the lender and receives loan payments from the borrower.