How to Invest in Promissory Notes with Your Solo 401k (2025 Guide)

Looking for new ways to grow your Solo 401k beyond the stock market?

Promissory notes may offer a potential source of fixed income while keeping your retirement plan tax-advantaged. With the right setup, your Solo 401k can invest in private lending deals backed by written agreements and interest payments. 

This guide explains how investing in promissory notes through a Solo 401k works, what IRS rules apply, and how to stay compliant.

What Are Promissory Notes?

A promissory note is simply a written promise to repay a loan. One person lends money, and the other agrees on paper to pay it back with interest, usually on a set schedule.

You might think of it like a formal IOU which typically lays out key details such as:

✅ How much is being borrowed
✅ How much the interest rate is
✅ When payments are due
✅ What happens if the borrower doesn’t pay

While the IRS doesn’t offer a specific legal definition of promissory notes, it classifies them as debt instruments when properly used in retirement accounts. For instance, IRS Publication 560 clarifies that issuing a promissory note to a retirement plan as a form of contribution is considered a prohibited transaction, highlighting the importance of proper usage and compliance.

These notes are commonly used in private lending and, when structured correctly, can be held within a Solo 401k.

📝 Note: You cannot use a promissory note to contribute funds to your Solo 401k (see IRS Publication 560). Doing so may trigger a prohibited transaction.

Can You Use a Solo 401k to Invest in Promissory Notes?

Yes, if your plan allows it. The IRS does not limit Solo 401k investments to traditional investments like stocks or mutual funds. As long as you avoid prohibited transactions, promissory notes are generally allowed.

However, not every Solo 401k includes this feature by default. You’ll need to check if your plan allows for alternative investments like promissory notes.

📝 Note: Most providers require checkbook control, meaning the Solo 401k must have a dedicated bank account under the trust name to process investments. This means you can write checks or send funds without waiting for a custodian to approve each move.

Potential Benefits of Investing in Promissory Notes

Adding promissory notes to your Solo 401k could help you build a more flexible retirement strategy. Here’s what they might offer:

✅ Tax-Deferred or Tax-Free Growth

When your Solo 401k earns interest from a promissory note, that income typically stays in the account without being taxed right away. If you’re using a Roth Solo 401k, those earnings could even grow tax-free. Taxes usually apply only when you take money out later.

✅ Predictable Income

Promissory notes usually come with fixed interest rates and repayment terms. That means your Solo 401k may receive steady payments on a set schedule — helpful if you’re looking for consistent income in your plan.

✅ Portfolio Diversification

Investing in notes gives your Solo 401k exposure to something different than stocks or mutual funds. This can help diversify your retirement portfolio and reduce reliance on the market. Just keep in mind that notes come with their own risks.

What Rules Do You Need to Follow?

If you want to invest in promissory notes with your Solo 401k, you’ll need to follow a few important IRS rules. Violating IRS rules on retirement plan transactions can result in taxes, penalties, or even plan disqualification. 

Here’s what to avoid:

✅ Don’t Lend to Yourself or Family

The IRS doesn’t allow your Solo 401k to do business with certain people, called disqualified persons. This includes:

✅ Keep It at Arm’s Length

Your loan deal must be with someone who has no personal or financial ties to you. That means no family or close friends, and no arrangements that benefit you outside of the 401k. This helps keep the deal fair and IRS-compliant.

✅ Use the Solo 401k Name on All Paperwork

All documents, payments, and accounts must be titled in the name of the Solo 401k trust—not your personal name. It shows the IRS that the investment truly belongs to your retirement plan, not you personally.

📌 Also Read: IRS – Tax Consequences of Plan Disqualification

How to Start Investing in Promissory Notes Through Your Solo 401k

Here’s a general outline for setting up a promissory note investment within your Solo 401k:

Step 1: Check your plan document – Make sure your Solo 401k allows investing in promissory notes. Not every provider includes this feature.

Step 2: Open a 401k trust bank account – Set up a bank account in your plan’s name using the trust’s EIN. This keeps retirement funds separate from personal money.

Step 3: Find the investment – Choose a promissory note or borrower. The borrower must be unrelated to you to avoid IRS rules on prohibited transactions.

Step 4: Write the promissory note – Include terms like loan amount, interest rate, repayment schedule, and collateral. Sign it as the trustee for the plan.

Step 5: Fund it from the 401k – Send the money from your Solo 401k trust account — not from your personal bank account.

Step 6: Track payments and keep records – Log all payments and save copies of the signed note and receipts. You’ll need these for taxes or future audits.

📝 Important: While these steps follow general IRS rules and common practices, some Solo 401k providers may have additional documentation requirements or approval processes. Always follow the procedures outlined in your specific plan.

Final Thoughts

Investing in promissory notes through a Solo 401k may be a useful strategy for diversifying your portfolio and generating fixed income. However, it comes with rules and risks that require careful planning.

If you’re unsure about IRS rules or how to set things up correctly, it might help to consult a qualified custodian or advisor who knows the process. Make sure to check your plan document and get guidance before you commit to anything.

📌 Want to learn more? Check out our other articles on Solo 401k strategies and IRS-compliant investment options.

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