Thank you for the question. You asked:
“A friends’ mother (85 years old) is thinking about opening a ROTH IRA and investing in a note.
What should we be aware of?”
Other than the standard due diligence on any investment, the key concern here is making sure that your friend’s mother has compensation type of income (generally, the type of income you pay Social Security and Medicare tax on) at least in the amount of the contribution, and no more than the maximum income limits ($117,000 for a full contribution for a single individual, with a partial contribution allowed with up to $132,000 of Modified Adjusted Gross Income, or MAGI, or $184,000 for a full contribution for a married couple filing jointly, with a partial contribution allowed with up to $194,000 of MAGI). If she is married filing jointly with her spouse, he can make the income as long as they file taxes jointly and do not make over the income limits.
A couple of other things come to mind. First, I would not spend every dime she has on a note unless you are really sure it will work out. If the Roth IRA owns the note and it goes into default, the Roth IRA must pay any foreclosure costs. Also, even though she will never have to take any Required Minimum Distributions (RMDs) from her Roth IRA, her beneficiaries will have to take RMDs, unless she leaves it to her spouse who assumes the account as his own. So depending on who she leaves the account to, she may want to leave enough cash in the account to cover any anticipated RMDs.
As a side issue, this looks to be a great opportunity to set up a Roth IRA which is to be inherited by a younger person. Once the Roth IRA is seasoned, the person who inherits the account can take tax free distributions for the rest of their life, regardless of his or her age. Therefore she will want to do some careful consideration to who she wants to leave this precious asset to upon her demise. I know no one likes to think about their own mortality, but to fail to plan is to plan to fail. Personally I would rather leave this earth with a smile on my face knowing I have done everything possible to keep the government’s grubby hands off of my hard earned wealth!
I’m not sure if that’s what you were looking for, but that’s my $0.02 worth. Have a great day, and good luck with your investments!