Ask the Self-Directed IRA and Solo 401k Experts

Is it really legal to borrow money from my Solo 401(k) Plan?

Oren T., AL

Hi Oren,

The IRS and the Internal Revenue Code permits 401(k) plan participants to borrow money from their qualified retirement plan as long as the Plan documents allow for it. Most Plan documents do allow for it as it is generally an option in the Adoption Agreement, which is the documents that adopts the Plan for the employer.

In the case of a Solo 401K Plan, prior to the 2002 Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTTRA), a self-employed individual was not able to take a loan for a Solo 401K Plan, also called an Individual 401K or Self-Directed 401K Plan.

The Solo 401K loan is a popular plan option especially over the last several years in light of the economic downturn and the tight credit markets.

In general, a loan from a 401(k) qualified plan or Solo 401K Plan is a taxable distribution unless it satisfies the following requirements:

The loan amount cannot exceed the greater of $10,000 (if your balance is under $20,000) or 50% of the plan participant’s vested account balance.

For example, if an individual is rolling $100,000 into a Solo 401K Plan, he or she can borrow up to $50,000. However, if that individual was only rolling in $60,000, then the most he or she can borrow is 50% of his or her account balance – or $30,000. In addition, if one has more than one loan outstanding, the total of all loans from the plan cannot exceed $50,000.

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