Solo 401k Loan
The Solo 401k loan is an attractive feature of the plan. It benefits both the plan and the participant.
The Solo 401k participant can borrow from his/her funds within the plan. He/she repays the loan to the Solo 401k, and the Solo 401k receives the amount back with interest.
The maximum loan amount is $50,000 or 50% of the participant’s account value, whichever is less. The loan uses the balance of the account as collateral for the loan. The loan is permitted at any time, and the participant can borrow up to three loans from his/her funds, as long as the combined amount does not exceed the maximum.
Solo 401k loan repayments are amortized over 5 years or less, with monthly or quarterly payments. The interest rate is set at prime rate + 1% at the time of the loan application.
Solo 401k loan example
As owners of M&N LLC, Mike and Nancy open a self-directed Solo 401k. They open separate participant accounts under the Solo 401k, noting the plan rules to separate the funds by type and participant.
Mike rolls over his Chase IRA into his Solo 401k, resulting in a balance of $191,000 in his Solo 401k account.
Nancy rolls over her Charles Schwab IRA into her Solo 401k, resulting in a balance of $286,000 in her Solo 401k account.
Mike can then borrow up to $50,000 from his Solo 401k account, and Nancy can borrow up to $50,000 from her Solo 401k account.
(If their Solo 401k accounts were worth $80,000 and $50,000 respectively, they could only borrow up to $40,000 and $25,000 respectively since the 50% maximum applies).
A few facts
- Maximum loan term is 5 years for general loans, or up to 15 years if used to purchase a principal residence for you as the Solo 401k participant
- Interest rate is prime rate plus 1 percent
- Loan repayments are made either monthly or quarterly
- Loan repayments are fixed payments consisting of interest and principal
- Interest-only payments or principal payments only are not allowed
- Maximum loan amount is either 50% of account balance or maximum amount of $50K
- Minimum loan amount is $1,000
- Proper loan documentation includes:
- Loan application form
- Loan calculator
- Spousal consent
- Loan promissory note
- Loan payment amortization schedule