Property Manager · Sacramento, CA · Member since 2015 · 161 posts · 24 votes
Hi BP, I would like to loan myself 50K from my solo401K to pick up a foreclosure at auction. My custodian says it's my responsibility to administer it. Seeking direction on the best way to do that. I'd like to minimize my payments on this, so 50K over 5 yrs. Do I need to set up an excel spreadsheet? What exactly does he mean by administer? I know I need to fill out my own loan application & promissory note, where do I send those docs, to the custodian? what else do I need to do to satisfy the requirements here, especially for the IRS. Thanks!
If that is the best you got from your custodian, then you picked the wrong folks to setup your Solo 401k with. Perhaps save the BP community from such by letting them know who this non-helpful provider is.
Yes, you do self-administer the loan.
The plan documents should contain a Participant Loan Policy and Promissory Note that will guide you.
Most plans require that the loan be amortized over 60 months, but allow for payments on a monthly or quarterly basis.
You need to keep records of the loan payments and outstanding balance. A simple spreadsheet will do. It should, of course, correspond to payments deposited into the Solo 401k bank account.
Lender · Hollywood, FL · Member since 2016 · 5 posts · 0 votes
9y
Well If I were you I would google the 1031 exchange program which allows you to roll funds over and not get taxed. Also I would look into the benefits of rolling your 401k directly into a property or directing it to be put in escrow and pay it back to the 401k
If that is the best you got from your custodian, then you picked the wrong folks to setup your Solo 401k with. Perhaps save the BP community from such by letting them know who this non-helpful provider is.
Yes, you do self-administer the loan.
The plan documents should contain a Participant Loan Policy and Promissory Note that will guide you.
Most plans require that the loan be amortized over 60 months, but allow for payments on a monthly or quarterly basis.
You need to keep records of the loan payments and outstanding balance. A simple spreadsheet will do. It should, of course, correspond to payments deposited into the Solo 401k bank account.
Even though we are not your solo 401k plan provider, contact me and we will prepare loan documents for free and explain the rules to you. I would hate so see you get audited for something so standard that all solo 401k providers should provide.
are you sure you have a custodial Solo 401k account? From your description it looks that you have a truly self-directed Solo 401k plan with the plan assets held in a trust setup specifically for this purpose (not in a custodial account) and you being the plan administrator. If it was a custodial account - they would be processing the loan paperwork and issuing the loan proceeds to you because you don't have direct access to your funds.
If you do in fact have non-custodial 401k then you are responsible for the loan administration and it's too bad that your provider does not offer any assistance/guidance with this. Brain provided some good overview for you above, follow that but go back to your provider and seek additional assistance from them.
Property Manager · Sacramento, CA · Member since 2015 · 161 posts · 24 votes
9y
@Brian Eastman, @Mark Nolan, @Dmitriy Fomichenko, @Justin Windham Thanks guys, plan docs do contain a loan app & promissory note. And yes, it is a self administered plan, so not custodial account. I guess I should have said plan provider not custodian. I have an email in to them for more input & am fully expecting it...or else:)), How long after I apply to myself can I write my first check? It's not like we have underwriting here since I'm applying to myself right? Thx again.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Jeff, after you get all docs in order you can get issue the check for the loan proceeds, so technically you could get loan processed, approved and issued on the same day.
Since you are the trustee of the solo 401k plan, you need underwrite the loan. Here are some loan facts to be aware of.
The Solo 401k loan term is 5 years for general loans.
The Solo 401k loan term can be more than 5 years not to exceed 30 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.
Solo 401k loan payments are made either monthly or quarterly
The interest rate for a solo 401k loan is either: A certificate deposit rate plus 2 percent or theprime rate plus 1 percent.
Solo 401k Loan payments are fixed payments consisting of interest and principal
Solo 401k loan rules do not allow for Interest only payments or principal payments only.
The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.
– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)
– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K
– The minimum Solo 401k loan amount is $1,000.
The Solo 401k rules require the following proper Solo 401k loan documentation:
Property Manager · Sacramento, CA · Member since 2015 · 161 posts · 24 votes
9y
@Brian Eastman, @Mark Nolan, @Dmitriy Fomichenko, @Justin Windham. Can I do this in quarterly payments? If so, may only have to make 1 payment because this should go no more than a few months. Also, when do I have make first payment? Begining or end of 1st pay period? Thx
The first payment is due three months after initial 401(k) loan proceed have been disbursed if you are doing quarterly payments. Also the following applies .
Solo 401k Loan Repayment Terms
IRC Sec. 72(p)(2)(C) requires that the loan amortization schedule provide for substantially equal payments to be made at least quarterly.
Solo 401k Loan grace period for late payment
Effective January 1, 2002, Treas.Reg.1.72 (p)-1, Q&A 10, provides for a cure period that allows a loan participant to avoid an immediate deemed distribution following a missed payment. The cure period may not extend beyond the last day of the calendar quarter following the calendar quarter in which the required payment was due.
The payment schedule should also be described in the loan policy. The policy for some plans will specify monthly payments, others quarterly. The IRS requires payments at least quarterly. What does your loan documentation say?
Property Manager · Sacramento, CA · Member since 2015 · 161 posts · 24 votes
9y
@Brian Eastman, @Justin Windham So I can pay quarterly, which means I may be paying back the whole 50K with interest in 3 months. When I pay interest on this loan to my solo401K is that considered income to the solo401K? If so, is that interest income sheltered from Uncle Sam?:) Thx
Who is charging those loan fees? The company that setup your plan? I don't have any familiarity with these fees because we don't charge them and I haven't seen them on other self-directed 401k plan docs.
Property Manager · Sacramento, CA · Member since 2015 · 161 posts · 24 votes
9y
@Justin Windham Good question, I will ask provider. They are already stated on the loan docs provided me in the sample forms section. Since I am administrator, shouldn't I get the fees?