Self-Directed IRA – Investing Process
1. Confirm Your Custodian Allows It
Not all SDIRA custodians handle private debt investments like promissory notes.
Verify your custodian permits:
Private lending
Notes secured or unsecured
Ask about:
Possible Required documents
Form of promissory note (unexecuted)
Copy to mortgage/deed of trust
Amortization schedule
Check/wire instructions for investment
Borrower’s signed W9
Fees (transaction, asset holding, etc.)
2. Perform Due Diligence
Unlike stocks, you are fully responsible for evaluating the deal.
Borrower’s creditworthiness
Purpose of the loan
Collateral (if any)
Repayment terms and schedule
Default provisions
Your custodian does NOT evaluate the investment—they just administer it.
3. Structure the Investment Properly
The IRA—not you personally—must be the lender.
The promissory note should be titled like: “XYZ Trust Company Custodian FBO [Your Name] IRA”
All documents must reflect the IRA as the investor:
Promissory note
Loan agreement
Security documents (if applicable)
4. Avoid Prohibited Transactions
This is critical under Internal Revenue Code Section 4975 prohibited transaction rules.
You cannot lend to or benefit:
Yourself
Your spouse
Your parents or grandparents
Your children or grandchildren
Entities they control
These are called disqualified persons. Violating this can disqualify your entire IRA (taxable event and penalties).
5. Submit Investment Direction
You’ll complete a Direction of Investment (DOI) form.
Typically includes:
Investment amount
Borrower details
Copy of promissory note
Wire or check instructions
Custodian then:
Reviews documents for administrative completeness
Sends funds directly from your IRA
6. Funding the Loan
Funds must go:
Directly from the IRA to the borrower
Never:
Route money through your personal account
Sign personally (always sign as IRA or “read and approved” if required)
7. Income and Payments
All payments must return to the IRA.
Borrower pays:
Principal
Interest
Payments go back into your IRA account (not to you personally) or Wallet if applicable
These earnings:
Grow tax-deferred (Traditional IRA)
Or tax-free (Roth IRA, if qualified)
8. Ongoing Administration
You or your servicer must track:
Payment schedule
Interest accrual
Defaults
Custodians require:
Annual asset valuation updates
9. Exit or Payoff
When the note is repaid:
Funds return to the IRA
You can reinvest or hold as cash
Common Mistakes to Avoid
Lending to a disqualified person
Signing documents personally instead of as IRA
Receiving payments personally
Poor documentation or missing collateral filings
Not valuing the asset annually