Self 401 k – About the Participant Loan Feature

Self 401 k

Self 401 k

The Self 401 k retirement plan is a highly recommended plan especially for qualified self-employed or small business owners. It is a remarkable way to build your wealth through a high maximum Solo 401 k contribution and investing your retirement money in unlimited qualified investment options. One of the many perks of a Self 401 k is the loan option for plan participants. Take note however that not all plan providers offer the loan feature for much needed financial solution and assistance.

The Self 401 k Loan Option in Perspective

There are few 401 k plan providers who are willing to provide loan options for their plan owners. Requirements must be complied with before your loan is approved.. Even though the IRS permits borrowing from 401k plans, some plan policies may restrict this option. Check with your plan provider whether the loan option is permited and how to complete the loan application. A comprehensive paper work prevents any future misunderstandings.

How much can you borrow?

According to the Solo 401 k calculator, the Self 401 k allows plan participants to borrow up to $50,000 or the half of the entire Individual k account value, whichever is less. Therefore, if a plan account value is $20,000, the plan owner can borrow 50% of the amount which is $10,000. However, if the total amount of the Self 401 k plan is $100,000, the plan owner is only allowed to borrow the maximum amount which is $50,000.

What about repayment?

The borrowed amount needs to be repaid within a 5-year timeframe, on a quarterly basis. The interest rate that the borrower needs to repay is Prime Rate + 1%, which is one of the most affordable and reasonable repayment margins. The Self 401 k loan requires the borrower to pay back the amount on time. Failure to repay your loan results to the distribution of the loan balance with tax penalty based on the taxable income rate. Early withdrawal penalty is also imposed on the borrower who is less than 59 ½ years.

Plan participants are not encouraged to resort to the loan option, unless financial constraints drive you to do so. The purpose of the Self 401 k retirement plan is to help you boost your retirement savings and not risk losing your funds with unpaid loans.

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