How To Invest in Mortgage Notes with Your IRA
Investing in mortgages with a self-directed IRA or Solo 401(k) is very popular. There is good reason for this popularity.
There is a wide availability of quality note investments that can generate solid returns. Your IRA can invest principal in a secure asset with stable value, and expect consistent and predictable returns every month.
With note investing, you can forget about the headache of opening a 401(k) statement after a particularly brutal news cycle. If being your own bank is an appealing investment strategy, here are a few things you should know about how this kind of investing works in a self-directed retirement plan.
Setup your Checkbook IRA or Solo 401(k) Plan
Yes, we say this for just about every type of investing. It’s simply the best way to ensure success.
It can take 3-5 weeks to establish and fund a Checkbook IRA or Solo 401(k). Once you’ve found a good lending opportunity, you generally will not have that long to get ready to act.
We recommend doing some research and analysis to see if there are good note opportunities that interest you, and build connections with the partners you may need along the way to source notes, record transactions, and provide servicing.
By vetting the strategy rather than looking for a specific opportunity, you can ensure that establishing a plan to pursue this type of investing makes sense.
Plans that offer Checkbook Control are generally much better suited to note investing than the services of a 3rd party IRA custodian. Note opportunities often need prompt action, and waiting for 3-5 business days for processing may not be an option.
Many notes — like to investors flipping property or building spec homes — are shorter term. The several buy/sell transactions that may occur each year can start to generate a lot of custodial fees. Meanwhile a checkbook plan will not incur any per-transaction fees.
Sourcing Notes
There are many ways you can find potential note investments. Some investors prefer using note brokers who find opportunities and perform diligence. Just getting the word out to local real estate investors, developers, realtors, or title companies can be a good way to network and turn up leads.
One thing you should avoid is creating your own marketing machine, such as a website or mailing campaign to originate note opportunities. This can create risk with IRS rules if you’re viewed as providing services to the IRA, or escalating what you’re doing to the level of a business rather than purely investments.
Passive interest income is fully sheltered to an IRA or 401(k), but trade or business activities may not be.
Perform Diligence
Whether you’re dealing directly with a borrower or working through a note broker, you’ll always want to be sure to perform diligence to ensure the minimum risk for your IRA.
Research the property and any outstanding title or debt issues, ensure the loan value is well secured by the property location and condition, and evaluate the borrower’s ability to pay. Having a property formally appraised may be appropriate as well.
Note Documents
If you’re working through a broker, the mortgage and deed of trust documents will generally be provided as part of the service. You’ll want to review the documents to ensure they accurately reflect the terms you have agreed to.
If you desire, your IRA or 401(k) plan can pay to have an independent attorney review these legal documents.
If you’re working directly with a borrower, you’ll need to have appropriate note documents created. A good place to start is with a title company or title attorney who may be able to generate documents or refer you to a reliable attorney who can.
In either case, a few of the following details are key:
- The IRA owned LLC or Solo 401(k) trust will be the lender
- You can sign on behalf of the entity in your role as LLC manager or 401(k) trustee
- The note instrument must comply with state lending laws with respect to terms and interest rates
- Any necessary borrower disclosures need to be included in the process
- Your plan can pay for legal and recording services or wrap these costs into loan fees paid by the borrower
Funding the Note
Once you have arranged for a lending transaction and have the necessary paperwork prepared, it’s time to act. With a Checkbook IRA LLC or Solo 401(k), you have signing authority and can execute the necessary documents and issue funds from your plan held account directly to the borrower or escrow.
No 3rd party review of paperwork or processing delays is necessary. The transaction can be funded by wire, cashier’s check, ACH or other means. The method of funding is not important, as long as all necessary funds are issued directly from your plan account.
Recording
Be sure to have your note instrument properly recorded as a lien against the property by the county recorder’s office. This is a critical step to ensure the enforceability of your plan’s claim in the event of a default.
If you’re working with a note broker, be sure to receive a recorded copy of the note for your records.
Collecting Payments
Once the loan is in place, your plan will receive the payments from the borrower. Be sure that funds are issued to the plan and not to you personally. The payments can be made by check or electronic deposit.
Of course, the payments of principal and interest are received into the plan on a tax-sheltered basis.
Compliance Considerations
Be sure to check with qualified counsel to ensure you operate according to state law when it comes to having your plan act as a lender. In some states, licensing may be required to originate loans depending on the type and frequency.
If licensing is required, you’ll have to utilize a 3rd party broker or note servicer who carries the appropriate licensing. Loans to commercial entities such as other real estate investors will often be less regulated than a mortgage issued to a homeowner living in a property.
You’ll also want to ensure that you provide any necessary reporting to your borrower as required by state law. As an example, issuing a 1098 to the borrower may be appropriate. An annual summary or regular statement may also be required.
Using a Note Servicer
While you can directly administer your plan’s lending transactions, there can be real benefits to using a professional note servicer.
From a plan perspective, you’re limited to basic administration. If your note investing becomes heavily involved or high volume, then the level of services you provide could become a potential risk factor with respect to self-dealing.
If you’re putting more than a few hours a week into the processing, you should consider hiring a 3rd party as a best practice. From a lending compliance viewpoint, leveraging the expertise of a professional can be valuable.
Laws related to disclosures and reporting, or the processes to remedy a payment deficiency can be complex and change over time. Working with a note servicing firm that has a clear understanding of the legal side of lending can make a real difference in the event a note transaction goes south.
In Summary
Having your self-directed plan be the bank and act as a lender is one of the most straightforward types of investment available. As with any investment, the real work comes on the front end in locating and evaluating notes.
Once you’ve identified a promising opportunity, the ability to execute directly with your self-directed IRA or Solo 401(k) makes for a pretty simple transaction. Then you can look forward to sitting back and watching payments roll into your IRA.
But like we mentioned earlier, to ensure good results when investing in notes, it’s important to do your homework first.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
