It is a little known secret that the IRS allows an individual leaving a job to use up to $50,000 of their retirement funds to start or finance a new business. Most people are not aware that when they leave their job, they have the right to roll those funds over to a new 401(k) plan tax-free. In fact, the Solo 401K Plan, also known as the individual 401K Plan or Self Directed 401K Plan, was created specifically for the self-employed business owner. With the Solo 401(k), a new business can adopt a Solo 401K Plan, which would allow the owner (you) to borrow $50,000 or 50% of their account value whatever is less and use that loan for any purpose, such as starting a new business. For an individual looking to start a business and needs less than $50,000, the Solo 401K Plan is a cost effective small business financing solution.
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.
A solo 401k loan is permitted at any time using the accumulated balance of the solo 401k 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 less than quarterly. The interest rate must be set at a reasonable rate of interest – generally interpreted as the Prime Rate as per the Wall Street Journal. As of 8/1/11 prime rate is 3.25%, which means participant loans are to be set at the very reasonable Interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application. The beauty of the Solo 401K plan loan, is that you can gain access to $50,000 of your retirement funds tax-free and instead of paying a bank back, you are paying your own Solo 401K Plan. In other words, the interest you are paying on the loan is going back to your Solo 401K plan tax-free and is increasing the value of the Solo 401K Plan.
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.
As a result of the recent economic meltdown, banks and other financial institutions have significantly limited their lending capacity to self-employed business owners, thus, causing grave financial pressure on self-employed business owners. The Solo 401k Plan is a perfect structure for anyone who had just left a job and is looking to start a new business. Instead of being turned away by banks too scared to help finance a new business – why not take matter in your own hand. Use your Solo 401K Plan and be your own banker. Gain access to at least $50,000 of retirement funds tax-free and without penalty and use those funds to help start or finance a new business.