A Solo 401(k) loan is permitted at any time using the accumulated balance of the Solo 401(k) as collateral for the loan. A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest – generally interpreted as prime rate as per the Wall Street Journal. As of 1/1/19 prime rate is 5.50%, which means participant loans may be set at a very reasonable interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.
How Can This be Done?
Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules allow a Solo 401(k) Plan participant to borrow money from the plan tax-free and without penalty. As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason. The Solo 401(k) loan is received tax-free and penalty free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc. Our in-house retirement tax professionals will assist you in completing the Solo 401(k) Plan documents in a timely manner once your Solo 401(k) Plan has been adopted.
When can a Participant Solo 401(k) Loan be Useful?
As a result of the recent economic meltdown, banks and other financial institutions have severely limited their lending capacity to self-employed business owners, thus, causing grave financial pressure on self-employed business owners. The Solo 401(k) plan is a perfect structure for any self-employed business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401(k) participants can borrow up to either $50,000 or 50% of their account value – whichever is less to help finance or operate their business.
Other useful ways of using the participant Solo 401(k) loan feature is to:
- Lend the funds to a third-party who will pay a higher interest rate
- Invest in a real estate project that offers a higher rate of return than the low interest rate you must pay
- To consolidate debt
- To pay for college expenses
- To pay for unexpected emergencies
- Avoid distribution penalties and use up to $50,000 immediately with no restrictions
- Invest in a new franchise or business
- Make any alternative Investment that will generate a higher rate of return than the low Interest rate imposed on you, such as tax liens, private placements, or mortgage pools
- Invest in a transaction that would otherwise be a Prohibited Transaction under Internal Revenue Code Section 4975
- Quick, easy, and cheap access to a $50,000 loan to be used for any purpose