Self-Directed Trust Deed IRA

Trust deeds inside a self-directed IRA compound without an annual tax bill. Inside a Traditional IRA, interest grows tax-deferred and is taxed only when you take distributions in retirement. Inside a Roth IRA, qualified distributions come out tax-free. The tax shelter compounds the advantage over time, especially for longer-horizon notes.

Want the basics first? See how self-directed IRAs work.

Anyone who is not on the disqualified person list. The IRA cannot lend to a disqualified person under IRS prohibited-transaction rules. That rules out you, your spouse, your parents and grandparents, your kids and grandkids and their spouses, plus any business those people control 50% or more of. Siblings, cousins, aunts, uncles, and friends are not disqualified and are eligible borrowers. The rules are complex. Talk to a tax advisor before doing any deal that involves someone you know. Read more on disqualified persons.

Under IRS rules on IRA disqualification, the IRS treats the entire IRA as distributed on January 1 of the year the violation happened. The full balance becomes taxable income that year, plus a 10% early-withdrawal penalty if you're under 59½. Other disqualified parties to the deal face a 15% penalty tax that climbs to 100% if the problem is not fixed within the correction window. If you think a line may have been crossed, contact a qualified tax advisor immediately. More on prohibited transactions.

Generally no. Passive interest income inside an IRA is not subject to Unrelated Business Income Tax (UBIT). The exception is Unrelated Debt-Financed Income (UDFI), which can apply if your IRA borrows money to fund the loan. That structure is uncommon for trust deed investing, but if you are layering leverage, get advice first. More on UBIT and UDFI.

Take a hands-off role. Collecting payments, chasing late notices, or running a foreclosure personally counts as providing services to the IRA. The IRS treats that as a prohibited transaction. Use a licensed loan servicer or an attorney for collections and any default proceedings.

Every loan payment must be remitted directly to the IRA, not to you. Tell the borrower or escrow agent to wire payments directly to the account. If a payment lands in your personal bank account, the IRS can treat the amount as a distribution, with taxes and a 10% early-withdrawal penalty if you are under 59½.

You are responsible for furnishing an annual fair market value for the note. Accuplan collects the valuation and the year-end balance is reported to the IRS on Form 5498. For a performing note, the value is typically the unpaid principal balance.

Yes, for Traditional IRAs. Required minimum distributions begin at age 73, rising to 75 in 2033 under SECURE 2.0. Notes do not have a market price the way stocks do, so plan ahead. You may need to keep cash in the account, take an in-kind distribution of part of the note, or sell the note at a discount to meet the RMD. Roth IRAs have no RMDs for the original owner. IRS, RMD FAQs.

Both are secured loans against real estate. The mechanical difference is that a trust deed adds a third-party trustee who holds the deed and is given specific instructions if the borrower defaults or pays off the loan. A mortgage runs directly between borrower and lender. From the IRA owner's perspective the cash flows look the same. The trust deed structure can simplify foreclosure in non-judicial foreclosure states.