I'm confused. Can you borrow money from solo 401k for personal use? I understand like buying your primary resident. Can you take a personal loan? Personal loan can be buying a car or anything personal like that right? Just not to fund your business?
The best way to find out your options is to contact your 401k company and ask.
I am able to borrow up to 50% of my 401k for personal use at around 4% with a 5 year amortization period. I pay the interest to myself.
I only use it to buy property cash and then refinance the money back out to pay off the 401k loan. BRRRR strategy.
Thank you, Ryan! How much do you pay for your plan? Like to open the account and yearly maintenance and stuff?
Unlike an IRA where the rules do not allow for participant loans, yes the 401(k) participant loan rules allow the individual to use the loan proceeds for any purpose including for funding your own business. The loan term is five years with payments made monthly or quarterly. However, if the proceeds are used for the purchase of your primary residence, the loan can be extended for as long as 30 years.
As the trustee/participant of your own 401k plan, you can take a loan/borrow from your solo 401k for any reason.
- 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 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:
– Solo 401k Loan Agreement
– Solo 401k Loan Application
– Solo 401k Loan Payment Amortization Schedule
The following IRS link covers the 401k loan rules.
Our 401k is employer provided.
Yes, you can borrow money from 401k plans for personal use. This includes Solo 401k plans as well. The loan policy will be spelled out in the plan documents, so the particulars of this feature can vary from plan to plan. Self directed Solo 401k plans typically offer the most flexible provisions. You can use the borrowed funds for any reason, including investment in your business.
Through a rollover as business start-up (ROBS 401k) one can invest their retirement funds in their own business. The 401k owner has to fund a business that offers goods or services and must be a w-2 employee of the the ROBS funded business. Other requirements include the use of a C-Corporation and the plan must be offered to employees once they have been with the business for a certain period of time. In short, specific rules apply at account establishment, during the life of the plan and business and on an annual basis.
Here are the ROBS 401k setup logistics :
Formation of a New C-Corp
The corporation documents are drafted and filed with the secretary of state.
Adoption of a New 401k Business Financing Plan
The 401k plan allows for the purchase of employer stock (i.e., shares of stock in a C-Corporation).
IRS Employer Identification Numbers (EIN)
Obtain employer identification numbers (EINs) for the corporation and the new 401k business financing retirement plan.
Bank and Brokerage Accounts
Set up the 401k brokerage account for holding the retirement funds and a business bank account for holding the Corporation funds.
Fund the 401k Business Financing Plan
Fund the 401k business financing plan by transferring former employer retirement funds (former employer 401(k), 403(b), TSP, IRA, etc.) to the new brokerage account.
Purchase Employer Stock
The funds are wired from the 401k business plan to the Corporation bank account and stock certificates are subsequently issued along with the rest of the corporaiton documents (e.g., bylaws, meeting minutes, etc.).
What Mark is referring to is a different structure altogether with some more moving pieces to it.
What I was talking about was the participant loan feature of a Solo 401k (or other qualified plan). Although you are correct you could not invest 401k funds directly into your business (outside of the ROBS structure that Mark mentioned), when you borrow funds from your 401k, they are YOUR funds and not the 401k funds until you pay them back to the plan. As such, you can use the participant loan funds for any reason, including investment into your business.
I paid a flat one-time fee of $2,000 to get mine set up with no annual fees. This also included a separate LLC for my business.
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It sounds like you may have been taken for a ride as a solo 401k plan needs to be kept up to date with changes in the law and that is one of the reasons why an annual fee applies. Is the solo 401k provider also keeping your plan documents up to date with changes in the law? It is pretty easy to charge thousands of dollars and then wash your hands.
I went back and checked with the Tax Attorney who set up the Solo 401K for me. My plan documents are up to date and are maintained. There actually is an annual fee ($199) but the original set up fee (from my attorney) covered the first year or maintenance for plan provider to keep it up to date. I was confused because I haven't seen an annual charge yet since I set the account up in 2014. So the original fee ($2,000) covered the 2015 annual fee. I didn't get an invoice for the 2016 annual fee because the tax attorney overlooked it. He's not going ask me for it but he did say I'd get an invoice for 2017 next month. According to him, some setup companies charge an annual fee on top of the one the plan provider charges. So if the plan provider (the one that maintains the plan documents) charges the setup company $199/yr to maintain the documents, the setup company would charge the client an annual fee on top of that. My attorney only charged me once at the onset. After that, I reimburse him for plan providers annual invoice without any markup. I'ts also free for me to call him with any questions I may have regarding related tax or legal concerns.
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