Solo 401K loans - what are the limits?

Question

So I have a Solo 401K plan where I am the trustee, since the IRS allows loans on the Solo 401K to the participant. I have some questions on the IRS rules for loans from a Solo 401K?

Is there a maximum term length? (i.e. 5 years, 10 years, 30 years, etc)

Is there a maximum percentage of the total value that can be loaned? (10% of total value, 20%, etc)

Is there a minimum interest rate that needs to be charged on the loan?

Thank you in advance for any responses.

Bernard Reisz · Answer

@Anthony Smoke

Solo 401k loan limits are the lesser of:

(A) $50,000 and

(B) the greater of (i) 50% of the participant’s vested account balance and (ii) $10,000

Solo 401k loans must provide for repayment within 5 years, unless the loan purpose is the acquisition of a principal residence.

The rate of interest should be similar to that which would be provided in an arm's-length transaction. What that means in practice is a bit of an open question and there has been IRS litigation about this, but there are some industry "norms" that your provider should be able to advise you about.

@Yonah Weiss Glad to chime in here and appreciate the mention.

Yonah Weiss · Answer

@Anthony Smoke great questions. I hope an expert like @Bernard Reisz can chime in with some answers for us all.

Anthony Smoke · Answer

@George Blower, @Bernard Reisz, and @Dmitriy Fomichenko

Hello and thanks everyone for replying to my questions. Yes, I need to reach out to my plan provider. The reason I was asking was to see if I could leverage my Solo 401k money as a way to purchase property instead of using a hard lender, then paying the loan back to the Solo 401k once I refinanced using a standard lender. Unfortunately the limit of $50k prevents me from doing this. I already have the Solo 401K setup and this is the vehicle that I am using to invest in properties.

I realized later that I posted this in the wrong forum, so I apologize for that. I meant to post in the financial loans forum. Thank you again for the responses.

Dmitriy Fomichenko · Answer

@Anthony Smoke

You've got some good answers already so I won't regurgitate, just wanted to add that questions like this are plan specific so it is best in the future to contact your plan document provider who can provide you more accurate guidance based on the features your plan has. Also be sure to analyze the numbers fully before proceeding with the loan. You are pulling tax deferred dollars which could be working for you in the tax-deferred environment and will be paying it back with after tax dollars. Don't use it just to pay for 'toys' or something else which could be financed with other sources.

George Blower · Answer

@Anthony Smoke

• If you are self-employed (i.e. active self-employment earned income separate from your w-2 income) with no full-time w-2 employees, you can set up a Solo 401k and then rollover your 401k funds once you leave your current job.
• You could then take a loan of up to 50% of the balance not to exceed $50,000.  Please be sure to select a Solo 401k plan provider which allows you to take a loan and will prepare the required 401k loan documents.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
• There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
• Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).

Solo 401K loans - what are the limits?

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