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Am I Restricted by the Prohibited Transaction Rules when Taking a 401k Loan?

No. A Solo 401(k) loan is permitted at any time and for any purpose 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 the Prime Interest Rate as per the Wall Street Journal. As of 7/1/16, the prime rate is 3.50%. The Interest rate is fixed based on the prime rate at the time of the loan application.

The Solo 401(k) Plan is a perfect structure for any self employed business owner seeking immediate funds for their business. Solo 401(k) participants can borrow money to help finance or operate their business. Other useful ways of using the participant 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 gain 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

Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Posted in Solo 401(k)