Use Solo 401 K Plan Rules to Pay off Debt
After the recent economic meltdown, many small business owners found themselves faced with overwhelming debt. Paying off debt was difficult, and options for help were few.
If you find yourself in a similar situation, the Solo 401 K plan rules offer an option. The Solo 401 K Plan is for self-employed individuals and small business owners who do not have full-time employees. The plan rules include a loan feature which can be used to get rid of debt.
Solo 401 K plan rules for participant loans
Participants can borrow from their 401 K through the participant loan feature. As participant, you can access up to $50,000 or 50% of your Solo 401 K Plan balance, whichever is less, as a loan. The loan amount is taken tax and penalty free. You can then use the loan amount to pay off any outstanding, high-interest debt.
From the standpoint of your Solo 401 K, this participant loan is an investment of the plan. Your Solo 401 K actually benefits from this loan as it is paid back with interest. You borrow from your retirement funds, and you pay the loan back to your retirement funds. Your Solo 401 K plan grows as a result. You benefit by paying down debt, and your 401 K benefits by receiving the loan amount back with interest.
Using the loan feature
The loan feature is simple and time-efficient to use. First, apply for the loan by completing the required documentation. Sense Financial provides the required documentation on its client portal. The terms of the loan are set at the time of application and must fall within certain guidelines. The maximum period is five years for a general loan or fifteen years for a primary home purchase. The minimum repayment basis is quarterly. Loan interest rate is the current Prime Rate plus one, at the time the loan is taken.
Second, approve and administer the loan as the plan administrator. You are both the participant of the plan and the plan administrator. As plan administrator, you keep all documentation on behalf of the loan. You must ensure that the loan is paid back to the 401 K according to the documented terms.
Third, take the loan by writing yourself a check or transferring the funds from the 401 K to you personally. The loan amount must go to you personally, not to your business or another entity
Fourth, repay the loan according to the terms on the required documentation.
Solo 401 K Plan rules state that the self-employed individual or small business owner can borrow against his/her total accumulated account balance within the plan. Small business owners using this feature can eliminate their financial woes with ease.
Solo 401 K plan rules offer additional benefits
- Truly self-directed: Manage your own account without the need of hiring a custodian, eliminating custodian fees and delays
- Significantly higher contribution limits: Contribute more compared to other retirement plans: $51,000 for the year 2013 (doubled if your spouse is also involved in the business)
- Avoid the UDFI (unrelated debt finance income) tax, unlike a self directed IRA
- Make Roth contributions, even if ineligible for a Roth IRA due to high income
- Easily transfer your existing retirement funds into your Solo 401 K Plan
If you have self-employment activity, as a small business owner or on the side, consider the Solo 401 K. Contact us today- our team is ready to answer your questions.
Related Terms:
- Solo 401 k Plan Rules
- Solo 401 k Plan
- Solo 401 k Plans
- Solo 401k