Over the last several years, hundreds of thousands of Americans have been impacted by the downturn in the U.S. economy and the tightening of the U.S. credit markets. As a result, many Americans have been placed in a difficult financial position faced with increasing financial pressures. Fortunately, Internal Revenue Code Section 72(p) allows a Solo 401K Plan participant to take a loan from his or her 401K Plan so as long as it is permitted pursuant to the business’s 401K Plan documents.
For individuals with an IRA or a qualified plan and are seeking immediate financial relief, the Solo 401k plan may prove to be your best option.
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 less than quarterly. The interest rate must be set at a reasonable rate of interest – generally interpreted as prime rate + 1%. As of 1/13/10 prime rate is 3.25%, which means participant loans are to be set at the very reasonable Interest rate of 4.25%. The Interest rate is fixed based on the prime rate at the time of the loan application.
The Solo 401k Plan is a perfect structure for any self-employed business owner seeking immediate funds for their business. Any self-employed business owner with pre-tax retirement funds (Roth IRA funds are not permitted to be rolled into a Solo 401k Plan) may roll over their retirement funds into a new Solo 401k Plan adopted by self-employed business owner. The following are some useful ways in which the Solo 401k Plan loan can be used:
- Pay off credit card debts
- Pay rent or mortgage payment
- Pay off a debt or liability
- Consolidate debt
- Fund or finance a business
- Pay for medical expenses
- Lend the funds to a third-party who will pay a higher interest rate
- Invest in a business
- Invest in a transaction that would otherwise be a Prohibited Transaction under Internal Revenue Code Section 4975.
Besides getting quick access to cash, the next best thing about the Solo 401k Plan loan is that the interest you are paying is going to your Solo 401k Plan and not a third-party or bank, thus, allowing you to build your retirement funds while gaining quick and inexpensive access to up to $50,000.