Investing with a Self Directed IRA

Unlocking Tax-Free Cash Flow: How to Invest in Mortgage Notes with a Self-Directed IRA - By Tracy Stein - Friday, August 29, 2025

With interest rates still elevated and real estate transactions slowing, private lending has surged as a critical tool for buyers and investors alike. For those looking to diversify retirement portfolios beyond Wall Street, private mortgage notes held in a Self-Directed IRA (SDIRA) present a compelling opportunity: steady interest income, collateral-backed security, and powerful tax advantages.

What Are Mortgage Notes - A mortgage note is the legal document outlining the terms of a real estate loan—loan amount, down payment, repayment schedule, interest rate (fixed or adjustable), and any prepayment penalties. For investors, private mortgage notes can offer:

Consistent income from borrower payments.
Collateral protection through the underlying property.
Liquidity opportunities since notes can often be sold in a growing secondary market.

Why Use a Self-Directed IRA - Unlike traditional IRAs, Self-Directed IRAs allow investments in alternative assets, including real estate and mortgage notes. The major advantage: all interest and principal payments flow back into the IRA without current taxation.

Tax-deferred growth (traditional SDIRA): Returns compound without tax until distribution.

Tax-free growth (Roth SDIRA): Qualified withdrawals are entirely tax-free.
This structure can accelerate retirement wealth-building significantly compared to holding similar investments in a taxable account.

Two Investor Pathways:

1. Full-Service Custodian-Controlled IRA:

Managed by a specialized custodian
Notes are titled in the custodian’s name “for the benefit of” the IRA owner.
The custodian handles compliance, reporting (IRS Forms 1099-R, 5498), and administration.

Best suited for investors who prefer a hands-off approach:

2. Checkbook Control IRA LLC:

The IRA owns an LLC, managed by the account holder.

Investor gains direct control over transactions—ideal for higher-frequency or time-sensitive deals.

Provides added liability protection and privacy.

Backed by the landmark Swanson v. Commissioner case (1996), which affirmed this structure as IRS-approved.

Example: An investor funds an SDIRA with $50,000. The IRA creates “Hot Money Loan LLC,” which lends directly to a borrower. All payments return to the LLC’s account, compounding inside the IRA tax-free.
Investor Takeaway

Private mortgage notes within a Self-Directed IRA are a smart way to combine:

Predictable income from real estate-backed loans.
Diversification away from market volatility.
Unmatched tax advantages for long-term wealth growth.

Whether through a custodian-controlled IRA for simplicity or a Checkbook IRA LLC for flexibility and control, investors can position their retirement funds to generate steady, tax-advantaged cash flow—turning today’s real estate lending demand into tomorrow’s financial security.

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