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Private Debt Investing with your 401k

Or how to make money by lending from your retirement funds

Private investors and large companies have, for years, benefited from higher-than-average returns by investing in notes.

However, you can do the same and invest in notes with your Solo 401k as well, taking advantage of this profitable investment option.

But that’s not all. In contrast to most other retirement accounts, as trustee of your Solo 401k plan, you have the ability to decide everything from the terms of the note to the rate of interest, giving you unrivaled control.

What is a promissory note?

A promissory note (typically referred to simply as a ‘note’ or private debt), is a legal document stating that a borrower will repay a loan within a specified time frame and at a specified interest rate.

When you invest in notes with your Solo 401k, you’re investing in this loan agreement (the note) and receiving the loan payments into your Solo 401k.

What determines a note’s value?

Investing in debt works a bit differently as the value isn’t as clearly defined as when investing in something such as stocks or real estate.

The value of a note is determined by 4 major factors, the first 3 having to do with the terms of the note itself:

  1. The sum of money to be repaid into the Solo 401k
  2. The interest rate
  3. The loan repayment window (how long will it take to receive the full loan amount plus interest)
  4. And the borrower (specifically, how likely they are to default vs. pay off the loan)

But what if the borrower fails to pay the debt? By investing in a note, you’re taking responsibility for a potential default. However, in the case of a secure note, this isn’t a problem.

There are two types of notes, secured and unsecured. Secured is generally considered a better investment because if the borrower fails to pay the loan based on the aforementioned terms, your Solo 401k can foreclose on the property or another physical asset which is securing the note, allowing you to take possession of said property and covering what would have otherwise been a loss.

However, in the case of an unsecured note, there is no collateral and your only option would be to take legal action against the borrower.

How to invest in private debts / notes with your Solo 401k

Investing in private debt (i.e. notes) is generally a pretty simple process, but you should make yourself familiar with the process so you can be properly prepared.

There are 5 steps to investing in notes with your Solo 401k:

1. Open your Solo 401k plan

I know, obvious step. However, make sure you don’t forget to first set up your Solo 401k account.

With a Solo 401k, you’re the trustee of the plan, so you’ll be able to dictate the loan terms such as payment schedule and interest rate– something not possible with other similar plans such as an IRA where you’re not listed as trustee.

This is also important because you need the name of the Solo 401k plan for the note agreement and other documents. If you don’t have it, you can’t complete the necessary paperwork and finalize your investment.

2. Open your Solo 401k bank account

Next, open your new Solo 401k bank account where the note payments will be deposited. Your initial deposit can be done via one of several methods, including:

  • A contribution
  • Rollover (via a Roth or pre-tax IRA)
  • Or a transfer from another qualified plan such as a 401k

3. Compose note

Now, you’re ready to compose the note document. Keep in mind that if you have a loan servicing agent this will be taken care of for you.

This is where you’ll decide the interest rate, payment schedule, and the maturity date (when the loan is due) among other things.

Also, it’s important to define the protocol in case of a loan default (which, as mentioned, mostly has to do with whether it is a secure or unsecure note).

4. Process the note investment with your Solo 401k

Once the note has been drawn up, review the agreement to make sure it abides by the Solo 401k plan requirements and regulations.

The lender listed on the note and all accompanying documents should be your Solo 401k, not your personal name. For example: Jane Smith’s Solo 401k.

5. Make investment with your Solo 401k and begin accepting payments

Next, make your investment using the Solo 401k checking account you opened in step 2.

Keep in mind that note payments should be made payable to your Solo 401k and deposited directly into your Solo 401k checking account.

Diversify your portfolio by investing in private debts with a Maverick 401k

Investing in private debts (notes) with a Maverick Solo 401k offers an additional powerful and proven investment option that only adds to the already strong portfolio of Solo 401k investment options.

So, if you’re ready to further diversify your portfolio by investing in notes with your own Solo 401k, click here to set up an account.

Alternatively, you can contact us here with any questions you may have and we’ll be more than happy to help.

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