Posted over 8 years ago

The Freedom to Choose with the Solo 401k Loan

Solo 401k

In the last few years, hundreds of banks have failed and closed.  Remaining banks have tightened their financial belts, making it harder for small business owners and self employed to obtain funding.  


The Solo 401k retirement plan contains a loan feature that allows participants to borrow from the account at a reasonable rate of interest.  A loan can be taken at any time, for any purpose.  This feature of the plan has been likened to having a bank that will never turn down a loan request. 


Choosing the Amount of the Solo 401k Loan


A Solo 401k loan can be taken from the account for up to 50% of the account balance, with a maximum limit of $50,000.  The amount of the loan depends on the account balance.  Other retirement accounts such as traditional 401k plans can be rolled over into the Solo 401k, raising the account balance and the potential loan amount.  The accumulated balance of the account serves as collateral of the loan. 


This loan can be made at any time.  With the proper loan documents prepared, the loan can be made immediately.  There are no income or credit qualifications required for the loan.


Choosing the Use of the Solo 401k Loan


The Solo 401k loan can be for any use.  This may be perfect for small business and self-employed individuals who wish to access funds immediately for their business expenses or personal use.  Small business owners with a participant spouse allow both spouses to take a loan from the account, giving a combined maximum amount of $100,000 in available funding. 


Possible uses for the Solo 401k loan include:


Lending to a third party
Investing in real estate
Investing in a new business
Investing in alternative options, such as tax liens, private placements, mortgage pools
Consolidating debt
Paying college expenses


Borrowing from the Solo 401k allows use of the funds without being subject to the IRC Section 4975 for prohibited transactions.  The loan also enables use of account funds without restrictions or distribution penalties.


The Solo 401k account is the lender of the loan; all payments including interest go back to the account.  Repayment of the loan must be made within five years.  The amortization schedule is somewhat flexible, but payments must be at least made on a quarterly basis.  A reasonable rate of interest must be included; this is usually interpreted as Prime plus one percent.  Default of the loan triggers taxes and penalties on the account. 


The Solo 401k loan feature gives participants the freedom to choose the use of account funds.  Participants can direct and invest their funds according to their choice.