The Solo 401(k) Loan Gives the Power of Choice
The closure of hundreds of banks over the last few years have ushered in stricter lending practices. Financial institutions are more hesitant to lend money, making it harder for the self-employed and small business owner to obtain loans.
With a Solo 401(k) loan, participants can borrow from their 401k. The Solo 401(k)’s participant loan feature gives the self-employed and small business owners a readily available source of funding at a reasonable interest rate. Participants can take the loan from their account for any reason and for any purpose.
Choosing the Solo 401(k) loan amount
How much can you borrow from your Solo 401(k)? It depends on the balance in your retirement plan account.
The maximum loan amount is up to 50% of the account value, up to $50,000. The remaining 50% account balance serves as collateral for the Solo 401(k) loan.
You can rollover other retirement accounts, such as the traditional 401k, 403b, SEP IRA, and traditional IRA into the Solo 401k. This raises the value of the account and the amount that can be borrowed from the account, up to the maximum.
Taking the loan
The process for taking the participant loan is simple.
The participant prepares the required documentation, which includes the application and amortization schedule. The participant is the plan administrator of the 401k and becomes the loan administrator as well. He/she approves the loan.
Once the required documentation is complete, the participant can take the loan immediately. The participant can write a check from the 401k account to their personal account. No credit qualifications needed.
The loan is free from taxes and penalties if it is paid back according to its terms. The participant must repay the loan in equal installments, monthly or quarterly, until the loan is repaid. The maximum period is 5 years. The loan can be extended to 10 or 15 years if used to purchase a primary residence for the participant.
Loan payments must be made at least quarterly. Payments include the principal plus interest; the interest rate is defined as Prime plus one percent. All loan payments are made to the Solo 401k account. Failure to repay the loan according to its terms may result in a loan default, triggering appropriate taxes and penalties.
Endless possibilities to choose from
Once the participant has the loan amount in their personal account, they can use the funds for any purpose. Funds can be used to make personal investments, consolidate debt, lend to a third party, or pay college tuition, to name a few. For the self-employed and small business owner, this participant loan gives access to account funds for any use.
Because the funds are in the participant’s personal account, their usage is not restricted or subject to Internal Revenue Code Section 4975 for prohibited transactions. The loan is not an in-service distribution of the fund and thus is not subject to distribution penalties.
The Solo 401(k) loan feature gives a powerful option to the self-employed and small business owners. Participants have an available source of funds, and the 401k benefits from the repayments with interest.
Contact us to find out more about this powerful option today.
