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Solo 401k Loan

What are the rules for a Solo 401k loan?

The Solo 401k must have been established with a loan provision. This is not an automatic feature of the Solo 401k. Loans are permitted in a Solo 401k, but not all Solo 401k providers allow loans within their specific Solo 401k.

1) You are permitted to borrow up to half of the assets in a Solo 401k, but there is a $50,000 maximum.

2) Loans are received tax free and penalty free and can be received at any time, even before retirement age.

3) There is no limit on how often a loan may be taken, but one loan must be paid off before another Solo 401k is initiated.

4) Loans may be taken for any purpose, at the discretion of the owner. There are no income qualifications or credit checks.

5) The loan must be paid back in an orderly way according to the Solo 401k loan amortization table. However, the interest paid on the loan goes back into your Solo 401k plan.

Because of the loan availability feature, greatly reduced are two of the biggest worries that prevent people from establishing a retirement plan, despite the tax advantages and despite the knowledge that retirement planning is necessary to avoid living on social security alone:

1) The worry that the business will have a bad year and wont be able to afford a contribution.

2) The worry that the money will be needed for an emergency use.

The solution to problem A is simply skip the contribution that year. Remember, the Solo 401k has a maximum annual contribution limit but no minimum required annual contribution.

The solution to problem B is to simply take a loan, even before the retirement age. Only the Solo 401k permits loans. Other retirement plans like the IRA, SEP IRA, Profit Sharing, SIMPLE IRA, etc impose a 10% penalty on withdrawals plus Federal and State taxes will need to be paid on a premature distribution.

The Solo 401k is a gem. Never before has such a useful retirement and tax planning tool been available to qualified small business owners and the self employed.

Learn more about who is eligible for a Solo 401k.

 

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.