Making loans from 401k is one of the benefits an individual can utilize from his self-employed retirement plan. As long as the amount to be borrowed doesn’t exceed $50,000 or 50 percent of his total savings (whichever is less), a solo 401k loan could be processed. For example, account holder A has $80,000 while account holder B has $110,000. Account holder A is eligible to take a loan from his account amounting to $40,000, half of his savings, while, account holder B could borrow $50,000, considering the upper loan withdrawal limit. Unlike other loans, the borrower can use this loan for any purpose whatsoever, starting with medical bill payments, tuition payments, vacation, or down payment for property et cetera.
It is always a good practice to avoid taking any amount from your retirement funds particularly through early withdrawal. Actually, even using a loan is not really recommended because when you take funds from your account, the opportunity of growth for that particular amount will be lost, but in case of emergency, your last resort is your retirement savings. Using the solo 401k loan feature would be more feasible than making early withdrawal, especially if you haven’t reached 59 ½ years old.
Early withdrawal particularly from non-roth 401k plan is subject to hefty taxes as well as penalty while taking loans from 401k is tax free and penalty free.
Money withdrawn through early withdrawals will leave the account permanently and will leave you with less money for retirement (unless you max out your contribution for the remaining years). On the contrary, loans from 401k can be replenished through repayment terms with interest rate paid at least quarterly. Early hardship withdrawal will prohibit an individual from making contribution to his plan for the next six months even if the individual’s finances improve. The Solo 401k loan repayment terms could start as early as the following month after taking the loan.
Another benefit of using a Solo 401k loan is its lower interest rate. As per the IRS guidelines, the interest amount should be 1% more than the current prime rate, which helps you avoid heavy interest rates charged by business loan lenders. Further, there are no credit checks or eligibility criteria for a Solo 401k loan, allowing you to use these funds during financial emergencies.