Solo 401k Procedure for Investing in Promissory Notes

As detailed in our prior article titled, “Solo 401k Investments and Procedure For Investing in Real Estate”, in addition to investing Solo 401k in real estate, Solo 401k may be invested in promissory notes, whether secured or unsecured. As such, this article concentrates on the procedure for investing your Solo 401k in promissory notes.

However, before applying the ensuing promissory note procedure when investing Solo 401k in promissory notes, first determine if you qualify to open a Solo 401k. Detailed in IRS Publication 560, to qualify for a Solo 401k plan just two requirements must be met, which are the presence of self-employment and not employing full-time employees besides the business owner his or her spouse or one other business partner.

Procedure for investing your Solo 401k in Promissory Notes

Because the Solo 401k will be investing in the Promissory Note, not you as the Solo 401k owner, the Solo 401k must be listed as the lender (also referred to as beneficiary).

Example: Olive Tree Solo 401k Trust, John Smith, Trustee

You as the Solo 401k owner/trustee will sign the promissory note document and documents securing the promissory note investment.

The promissory note document generally contains the following information: loan amount, rate of interest, note payment due dates, note maturity date and parameters for dealing in the event the borrower fails to meet the note payments.

Draft promissory note payment schedule to account for promissory note payments since you are the Solo 401k trustee and thus ultimately responsible for safekeeping the Solo 401k investments.

Make sure the instrument securing the promissory note is properly recorded if the note is secured.

For example, if the promissory note is secured by real estate the deed of trust must be recorded in the name of the Solo 401k listing the Solo 401k as the beneficiary.

Example: Olive Tree Solo 401k Trust, John Smith, Trustee

For example, if the promissory note is to an entity, the company’s equipment may serve as security and therefore listed as such in the company’s operating agreement if the company is an LLC.

The promissory note will be funded with Solo 401k funds; therefore, the funds must flow from the Solo 401k’s bank account, not the Solo 401k owner’s/trustee’s personal bank account.

After the promissory note investment is funded using Solo 401k funds, you will either higher a loan servicing agent or perform this role yourself. The loan servicing agent will be responsible for collecting and depositing the promissory note payments to the Solo 401k bank account. The servicing agent is also in charge of confirming that the documents securing the promissory note investment are properly recorded.

Promissory Note vs. Solo 401k Loan

Do not confuse a promissory note investment with a Solo 401k loan. A solo 401k loan consists of the Solo 401k owner/trustee borrowing from his or her own Solo 401k and then paying the loan back with interest. On the other hand, a promissory note, as described above, is treated as an investment and therefore cannot be made to the Solo 401k owner/trustee as it would be deemed a prohibited transaction subjecting the entire Solo 401k account to payment of federal taxes.

In our next article we will discuss the process for investing your Solo 401k in private companies and provide procedure for doing so.
Sabung Ayam
Austin Hanks with ZZ Top
The celebrated songwriter's follow-up to 2005's solo debut Salt of the Earth features Billy Gibbons of ZZ Top, Rickey Medlocke of Lynyrd Skynyrd, Steve Ferrone of Tom Petty, and Jimmy Hall of Jeck Beck and Wet Willy.

Produced by Grammy Award Winner DAVID BIANCO (Tom Petty, Bob Dylan, Johnny Cash, U2, David Bowie, Fleetwood Mac and many more). Co-produced by Austin Hanks and Executive Producer, Billy Gibbons.

A singer-songwriter and left-handed guitar player from the foothills of the Appalachian Mountains of Alabama, Austin Hanks currently resides in southern California. His music has been described as “rockin’ country soul” and “genuine juke and twang from the dirty south.”

Hanks' country-rock sound doubles down on roadhouse honky tonk with infectious southern boogie guitars. His raspy Jackson Browne-like tenor delivers each song with undeniable grooves and frontman power not unlike rock and roll legends Tom Petty and Bruce Springsteen.