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Self-Directed Investing in an Unsecured Note (with Qualified Funds)

Feb 15, 2019

Sometimes called a Promissory Note or a Straight Note, an Unsecured Note is only guaranteed by the borrower’s promise to pay. The borrower signs a note, which may be as simple as a hand written agreement. Provident Trust Group requires the borrower’s signature to be notarized.

The note spells out the terms of the loan, such as interest rate, loan amount, and payment schedule. The loan may be amortized, interest only, or a balloon note (receiving full payment and interest at maturity).

 

You cannot participate in a prohibited transaction

When using retirement funds to invest in an Unsecured Note it is important for the qualified account owner to understand the Internal Revenue Service (IRS) rules and regulations to avoid engaging in a prohibited transaction with a disqualified person that could lead to a complete distribution of the account with taxes and penalties incurred. A prohibited transaction is any improper use of the retirement account by the account owner, beneficiary or any disqualified person.

A “disqualified person” includes, but is not limited to:

  • Yourself
  • Your lineal ascendants and descendants
  • The spouse of a lineal descendant
  • Your spouse
  • Any entity that is owned 50% or more by disqualified persons
  • An entity that is controlled 50% or more by disqualified persons

Examples of prohibited transactions include:

  • The borrower is a disqualified person or entity.
  • The terms of the loan would provide an undue benefit to the qualified account or the borrower.

DISCOVER THE POWER OF TRUE SELF-DIRECTED INVESTING

Our Self-Directed IRA allows you to invest in what you want, when you want. The investment possibilities are endless.

Discover the power of true self-directed investing

Our Self-Directed IRA allows you to invest in what you want, when you want. The investment possibilities are endless.

When using your qualified account to invest in an Unsecured Note, there are a few key items to remember:

  • You are responsible for performing due diligence on your investment. Every investment has unique risks and any decision to invest should only be made after you conduct a thorough review of the investment and any parties related to the investment. Provident Trust Group is a passive, directed custodian and as such does not provide any type of investment advice or due diligence.
  • The borrower’s signature must be notarized.
  • You should consider obtaining a W-9 from the borrower.
  • All loan payments must be made to the qualified account.
  • You must provide a Fair Market Value of all assets held in your qualified account annually.

Required Documentation

  • Direction of Investment Form
  • Copy of the signed note
  • Payment Schedule

 

Investment Titling

You and your qualified account are two separate entities and your qualified account is considered the legal owner of this investment. As such, all documents must reflect this ownership. Failure to title the asset correctly may cause delays and/or tax consequences. The correct titling for all investment documents should be as follows:

“Provident Trust Group, LLC FBO: your name and account type

 

Resources

IRS Publication 590A – Contributions to Individual Retirement Arrangements (IRAs)
https://www.irs.gov/pub/irs-pdf/p590a.pdf

IRS Publication 590B – Distributions from Individual Retirement Arrangements (IRAs)
https://www.irs.gov/pub/irs-pdf/p590b.pdf

IRS Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
https://www.irs.gov/pub/irs-pdf/p598.pdf

Internal Revenue Code 4975 – Tax on prohibited transactions
https://www.law.cornell.edu/uscode/text/26/4975

Please Note: Provident Trust Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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