What buying a first performing note inside a self-directed Roth actually requires
Buying a small performing first-position note inside a self-directed Roth IRA is a useful way to see how paper investing inside a retirement account actually works mechanically, separate from the return itself. Take a note with a face value of $28,500, remaining balance $27,140, at 8.5 percent, 14 years left, payment of $246 a month in principal and interest, purchased at 89 for $24,155. A borrower with 31 months of clean pay history and a modest single family property assessed around $61,000 gives a comfortable loan to value even allowing for a soft assessment. The appeal of holding it inside an IRA is that interest income is exempt from UBIT, and if no leverage is used to buy the note there is no debt-financed income piece and nothing extra to file. It accrues in the account with no property to maintain and no contractor relationship to manage. Two mechanical points matter more than the return itself. First, on the direction of investment form, the payee and assignment lines need to name the IRA and custodian, not the account holder personally. Naming yourself personally on a note the IRA paid for creates a serious problem, and a good custodian's processor will catch and reject it before it goes through. Second, servicing needs to be set up before the purchase closes. Skipping that step means filing a transfer of servicing plus a hello and goodbye letter to the borrower after the fact, which can delay the first payment by several weeks.
