Note investing in a Self Directed IRA

[Andria Kobylinski]

Hey all, newbie to Note Investing here. I am currently working on opening a self directed IRA and would like to use it to buy a few notes to start. Can I buy non-performing notes in my IRA or only performing? Aren't there some rules about how much involvement you can have in working within a self directed?

[James McCullin]

Andria, it's so exciting you're learning about the power of SDIRAs early in life. I sure wish I had! The IRS prohibits self-dealing which basically means that you, as the SDIRA owner, or any other disqualified person (consult with the SDIRA custodian for this list) cannot provide a service to the SDIRA. For a performing note, the most obvious violation would be to service the loan yourself (e.g., receive payments directly from the borrower). You must instead hire a third-party licensed servicer to handle payments, escrow for taxes and insurance, and conduct all borrower outreach. Performing notes are very common in SDIRA accounts. The risk of self-dealing is compounded with non-performing notes since there are so many other tasks that need to be accomplished during the workouts. It can perhaps be done, but all workout and maintenance duties would need to be delegated to third-party vendors. You can oversee these vendors, but aren't allowed to do any of the actual work. Another consideration which pertains to all notes in an SDIRA, but is especially true of non-performing notes, is that you must have enough reserves in the SDIRA account to cover all workout expenses. All checks written to vendors must come from the SDIRA account (via the custodian) and not your personal funds. Please educate yourself thoroughly on the "gotchas" that arise with notes held in an SDIRA account. Your custodian will be the best source of this education. The downside risk is great if the IRS determines that you've broken the rules. You can be forced to distribute your entire SDIRA in the year of the infraction, with all proceeds taxable in the distribution year along with any early distribution penalties that may apply. Happy investing!