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 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.
How do I Take Out a Loan from My 401K Plan?
As long as the plan documents allow for it and the proper loan documents are prepared and executed, a participant loan can be made for any reason. 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.
Our 401k Plan documents will allow you to use a loan from your Solo 401k for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc.
When can a Solo 401K Loan be Useful?
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 any self employed business owner seeking immediate funds for their business. 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 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
- Help make personal mortgage payments
- Help pay off credit card 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.
Solo 401k Structure
To view a diagram of the Solo 401k structure, please select the image below and don’t forget to follow our daily 401k blog at Bergman401kReport!