Growing Solo 401K via Note to Trustee?

5 Replies

I have a self-directed 401K (solo 401k), and purchasing real estate for buy and hold. However, I would like to grow it by taking after tax dollars (W2) and issuing myself a promissory note of 50K but instead of doing “minimum” payments of prime + 1%, could I artificially increase it to say prime + 5%? Is there a max limit? Also checking with my custodian but wanted to solicit input on whether that would be ”prohibitive”. Thanks for the input.

Account Closed

While your plan should have a default interest rate for participant loans in the loan policy, the IRS requires that the interest rate be "reasonable," leaving some room for interpretation. Some attorneys recommend evaluating the interest rate to make sure that it is indeed reasonable given the parameters of the loan. Increasing the prime adjustment five fold and "artificially" raising the rate (especially knowing that your intent is to grow the account by doing so) would likely expose you to some risk in the event of an audit. If you have an actual custodian on your 401k, they may not be able to provide much help. Perhaps you have a plan provider with meaningful support. In any event, a qualified tax advisor and/or attorney may be helpful.

@Daniel Chow

The general IRS guideline is to use the current prime rate plus one point at time of the loan. The IRS is just as concerned of the participant paying a higher rate which can be seen as a way to exceed the solo 401k annual contribution rules or to get more funds into the plan.