Solo 401 k Loan Tax – Tips to Avoid Retirement Plan Penalties

Solo 401 k Loan Tax

Solo 401 k Loan Tax

According to the Solo 401 k loan tax rules, plan participants are allowed to borrow from the Self-Directed 401 k and repay the Prime Rate + 1%. The loan limit is $50,000 or 50 percent of the total plan value, whichever is lower. For instance, if the total retirement plan value is $20,000, your allowed loan is half of that amount or $10,000. Regardless of the loan amount however, the loan value should not exceed $50,000.

About the Solo 401 k Loan Tax and Other Policy Rules

If the borrower cannot pay back the required amount before the due date, the loan balance is considered a distribution from the plan and subject to taxes at the taxable income rate of the owner. If the plan owner is younger than 59 ½ years old, an additional 10% penalty will also apply on top of the income tax. The Individual 401k is the best retirement plan for small businesses and self-employed individuals but it may impose Solo 401 k loan tax if you don’t pay back the  borrowed amount on time.

Where to use the borrowed amount?

Avoid the Solo k loan tax and you can enjoy the perks of your loan option. Borrowers can use the borrowed amount at their discretion. It could be to pay bills, tuition fees, and even finance a private business.

Great Savings with the Max Contribution Solo 401 k

The Solo 401k retirement plan is one of the most lucrative retirement investments for investors. The maximum contribution limit in an annual basis is basically 10 times higher compared to other retirement policies available today. The overall contribution limit is $24,000 for the employee deferral elective and the amount is inclusive of the $6,000 catch-up contribution for plan owners that are 50 years of age and older. For the profit sharing elective, the maximum contribution limit is $59,000 for age-qualified plan participants. Make sure you comply with the contribution requirements before the 2015 Solo 401 k contribution deadline. Higher maximum plan contribution means bigger savings and bigger retirement funds for wealth-building investments of your choice.

Borrowing money from the Solo 401 k plan is a great alternative especially if the plan owner really needs the funds to use on urgent financial situations. However, it is not highly recommended for plan owners to borrow money from their account and risk penalties or taxes in case of repayment failure.  The Solo 401 k loan tax is only applicable if you failed to repay the amount you borrowed within 5 years on at least a quarterly basis.

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