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Investor Insights Blog|5 Reasons to Consider Investing in Promissory Notes with Your Self-Directed IRA

Promissory Note Investing

5 Reasons to Consider Investing in Promissory Notes with Your Self-Directed IRA

signing paperwork

Promissory note investing, or private lending, is an investment approach that has the potential for steady returns with less work than some other types of investments.

Private lending”  means an investor lends their personal capital for an investment, often dealing with real estate funds or real estate opportunities.

A promissory note is a written promise of payment from one person or organization to another. Promissory notes contain terms including how much is being borrowed and the frequency and amount of payments.

There are various types of notes such as promissory notes, mortgage notes, car loans, hard money lending, real estate notes (for rehabs), and draw notes (also known as construction notes). Notes can be secured by collateral or unsecured (Learn more).

Many investors use their retirement accounts, in the form of self-directed retirement accounts, to invest in notes. As long as the guidelines are followed, there are several advantages to lending money from your retirement account.

You might be wondering, “Why should I invest in notes with my IRA?”

Here are five reasons some investors find this asset attractive.

Potential Benefits of Holding Notes in a Self-Directed IRA

1. Note investing can be more passive than other investment types

If you’re interested in real estate investing but don’t want to deal with the issues that can arise with managing a rental property or finding tenants, note investing may offer a solution.

Lending money to a real estate investor only requires you to collect monthly payments (or whatever frequency you agree upon) from the borrower. There are no property or other maintenance concerns to consume your time.

[Related: Client Guy earns 10 percent with hands-off note investment]

2. Note investing provides the potential for steady returns

The terms of the note set the interest rate you’ll receive, eliminating any guesswork on the return on your investment. That often isn’t the case with other investment types.

Generally, the interest rate charged on notes from private lenders makes the investment lucrative. For example, a majority of Equity Trust clients with notes in their accounts received interest at rates of 10 percent or greater on their notes. That’s a better rate of return than you see with many asset types.

Table: Equity Trust Client Note Values By Term and Interest Rates

Interest Rate Compared to Maturity
2 Years or Less Maturity2-Plus Years Maturity
Under 3%2.9%1.5%
Represents notes purchased in Equity Trust accounts from 2016-2020.

3. Keep more of your profits with tax benefits

Your note investment grows free of short- or long-term capital gains taxes when it’s inside an IRA or other government-sponsored savings account.

The accounts bring other potential tax benefits as well. Any qualified withdrawals you take in retirement are either tax-deferred (in a traditional IRA) or tax-free (in a Roth IRA).

[Related: Guide to self-directed accounts and taxes]

4. You can create wealth for your future

Investing in notes in an IRA or Roth IRA allows you to build toward a comfortable retirement. It also could allow you to establish your legacy: You may leave the account to your children and/or grandchildren as beneficiaries.

Self-directed note investing can help you save toward other goals as well. Notes can be held in other self-directed accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, as well as retirement accounts geared toward small-business owners.

5. Note investing in a retirement account is easy … with the right custodian

To be able to invest in promissory notes in an IRA or other retirement account, the account must be held at what’s known as a self-directed account custodian. Even then, it’s important to do your due diligence and research your options, as not every self-directed custodian is the same.

At Equity Trust, it’s easy to find an investment, invest, and manage your account:

  • Finding opportunities – If you’re interested in note investing but haven’t found an opportunity, we can help: The Investment District online marketplace connects you to potential investment options for your account. Investment District provides you access to providers in private lending and other asset classes.
  • Submitting an investment – Once you’ve located an investment – on your own or through Investment District – it’s easy to initiate that investment in myEQUITY, our online account management system. Simply follow prompts in the online wizard to submit your investment, and Equity Trust sends the funds as directed.
  • Receiving note payments – Borrowers can simply make note payments online through our Online Payment Center – no check mailing required.
  • Managing the investment – Throughout the entire life of your note and beyond, you have a clear line of sight to payments received, account balance, and more with myEQUITY.

Have questions about investing in notes and private lending in a retirement account? Our knowledgeable IRA counselors are here to help. Talk to someone today.


What investment options are possible with an Equity Trust account?

Some of the investments Equity Trust clients make using their self-directed accounts include real estate, tax liens, digital currencies such as Bitcoin, private lending, purchasing notes, private placements, precious metals, forex and other investment options that are permissible under IRS guidelines.


How do I find an investment for my self-directed IRA?

It’s easier than ever to locate a potential investment opportunity that suits you. Visit Investment District, our online marketplace, to browse investment options from cryptocurrency, lending, precious metals, private equity, and real estate asset providers.

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