Solo 401k Loans
Self employed loans using the Solo 401k
The Solo 401k is the newest retirement plan to benefit the self employed. Solo 401k plans have several benefits that are unique compared to other self employed retirement plans such as a SEP IRA or Keogh. One feature that can be very valuable to a self employed business owner is the ability to receive a Solo 401k loan.
How does a Solo 401k loan work?
A Solo 401k loan is permitted at any time using the accumulated balance of the Solo 401k as collateral for the loan. Loans in a Solo 401k are permitted up to 50% of the total balance of the Solo 401k up to a maximum of $50,000. For example an individual with a Solo 401k balance of $100,000 or more would be permitted to have a loan up to the maximum $50,000 legal limit. An individual with a Solo 401k balance of $50,000 would be permitted to have a $25,000 Solo 401k loan. The money remaining in a Solo 401k after a loan is received continues to be invested and the investment earnings continue to grow tax deferred.
Can I rollover my other retirement plans into my Solo 401k and then take a Solo 401k loan?
Yes. You can rollover other retirement plans to a Solo 401k to consolidate your other retirement plans and quickly build the value of your Solo 401k. By rolling over your existing retirement plans into a Solo 401k you build the balance quickly in the Solo 401k and then use its value to receive a larger Solo 401k loan.
What retirement accounts can be rolled over into a Solo 401k?
Retirement accounts that are permitted to be rolled over into a Solo 401k include a 401k, 403b or 457 plan from a previous employer, SEP IRA, Keogh plans (money purchase/profit sharing plan), defined benefit plans, Traditional IRA and Rollover IRA.
A Roth 401k from a previous employer may be eligible to be rolled over into a Solo Roth 401k provided the 401k plan document permits Roth 401k contributions and rollovers. Roth IRAs can’t be rolled over into a Solo Roth 401k.
Is a Solo 401k loan tax free?
Yes. The Solo 401k loan is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.
When does a Solo 401k loan need to be repaid?
In general a Solo 401k loan must be repaid in no longer than 5 years. If a Solo 401k loan is used for the purchase of a primary residence then a loan may be extended to as long as 10 or 15 years. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties. However, payments of interest and principal on the loan are paid into your own Solo 401k.
Can I repay my Solo 401k before the term of the loan?
Yes. You can pay off the balance of the Solo 401k loan at any time without a pre-payment penalty.
When I receive a Solo 401k loan do I have to pay interest?
Yes. Loan payments are made monthly or quarterly and each loan payment will consist of principal and interest. Generally, the loan interest rate charged is the Prime Rate or the Prime Rate plus 1% (the interest rate depends on the 401k provider’s plan document). It is very important to note that the principal and interest payments are paid back into your Solo 401k. A Solo 401k loan is unique because the payments of principal and interest go directly to your own Solo 401k plan which is very favorable compared to other loans where interest is paid to the bank or lending institution.
Are there any credit checks or income qualifications to receive a Solo 401k loan?
No. There are no income or credit qualifications to receive a Solo 401k loan and the loan can be used for any purpose. This feature of a Solo 401k loan is interesting because start up businesses and self employed business owners often run into difficulties with qualifying for a self employed loan through banks and lending institutions.
A Solo 401k loan can be very valuable to a self employed business owner. A Solo 401k loan can be a financing tool to provide capital to finance such things as the startup of a business, to consolidate debt, to pay for college expenses or for unexpected emergencies. A Solo 401k loan can be provided quickly, tax free, penalty free and without credit checks or income qualifications and the money can be used for any purpose.