One benefit of the Solo 401k is a 401k loan. IRS rules permit 401k loans, however not all Solo 401k providers allow loans.
Provided there is a loan provision, then a 401k loan is permitted using the accumulated balance of the 401k for the loan. 401k loans are permitted up to 50% of the total balance of the 401k up to a maximum of $50,000. A loan from the Solo 401k is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.
Solo 401k loans are repaid either monthly or quarterly and typically a 401k loan has a 5 year term. A Solo 401k loan used for the purchase of a primary residence may have a 15 year term (the maximum loan term for a residence will vary depending on the provider). 401k loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated.
Example: Bill is a 45 year old sole proprietor with no employees. Bill decides to open a Solo 401k to save for his retirement. After opening the Solo 401k he transfers $25,000 from his Rollover IRA, $25,000 from his SEP IRA, $25,000 from his Traditional IRA and does a 401k rollover of $25,000 from a previous employer’s 401k.
After the four retirement accounts have been transferred into Bill’s Solo 401k he would have a $100,000 balance. He would qualify for a maximum 401k loan of $50,000. If Bill submitted a 401k loan request for $50,000 then he would receive a check for $50,000 for the loan and he would have a $50,000 balance remaining in his Solo 401k. The remaining $50,000 would continue to be invested and monthly loan payments would also be invested.
Note: A Solo 401k loan is not a debt instrument. The loan is not made by a bank or lending institution. With a 401k loan you are simply borrowing your own money from your 401k
Can I rollover my other retirement plans into my Solo 401k and then take a Solo 401k loan?
Yes. You can rollover other retirement plans to a Solo 401k to consolidate your other retirement plans and quickly build the value of your Solo 401k. By rolling over your existing retirement plans into a Solo 401k you build the balance quickly in the Solo 401k and then use its value to receive a larger Solo 401k loan.
What retirement accounts can be transferred into a Solo 401k?
Retirement accounts that are permitted to be rolled over into a Solo 401k include a 401k, 403b, 457 and Thrift Savings Plan from a previous employer. You can also rollover a SEP IRA, SIMPLE IRA, Keogh plans, Defined Benefit Plans, Traditional IRA and Rollover IRA into a Solo 401k.
A Roth 401k from a previous employer may be eligible to be rolled over into a Solo Roth 401k provided the 401k plan document permits Roth 401k contributions and rollovers. IRS rules do not allow a Roth IRA to be rolled over into a Solo Roth 401k.
Is a Solo 401k loan tax free?
Yes. The Solo 401k loan is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.
When does a Solo 401k loan need to be repaid?
In general a Solo 401k loan must be repaid in no longer than 5 years. If a Solo 401k loan is used for the purchase of a primary residence then a loan may be extended to as long as 15 years. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties. However, payments of interest and principal on the loan are paid into your own Solo 401k.
Can I repay my Solo 401k before the term of the loan?
Yes. You can pay off the balance of the Solo 401k loan at any time without a pre-payment penalty.
When I receive a Solo 401k loan do I have to pay interest?
Yes. Loan payments are made monthly or quarterly and each loan payment will consist of principal and interest. Generally, the loan interest rate charged is the Prime Rate (3.25%) plus 1% or 2%. The interest rate depends on the 401k provider’s plan document. A Solo 401k loan is unique because the payments of principal and interest are paid back directly to your own Solo 401k plan.
Are there any credit checks or income qualifications to receive a Solo 401k loan?
No. There are no income or credit qualifications to receive a Solo 401k loan.
Why consider a Solo 401k loan as a small business loan?
Small business loans are often needed by small business owners, entrepreneurs and self employed individuals. Getting a small business loan through banks and lending institutions can be difficult. Potentially there is a simple solution. Many small business owners are getting loans up to $50,000 using a Solo 401k loan as a small business loan because 401k loans are fast, easy to obtain and have favorable interest rates.
What are the advantages of using a Solo 401k loan as a small business loan?
- The loan can be used for any purpose.
- Since you are using your Solo 401k’s balance, you are automatically approved for the loan.
- There are no income or credit qualifications. As a result, bad credit won’t prevent you from getting a 401k loan.
- Since you are borrowing your own money, principal and interest payments are paid back into your own 401k.
- Loan interest rate is low – Prime rate (3.25%) plus 1% or 2%.
What are the disadvantages of a Solo 401k loan?
401k loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the 401k loan according to these terms will result in a loan default. Income taxes would be due on the remaining unpaid balance of the loan and there is a 10% IRS penalty.
Also, by taking a 401k loan you are removing assets from your 401k. If your investments grow in value the outstanding loan balance will not experience that growth. As a result, you may not experience the same level of growth in your portfolio as compared to if you not taken a 401k loan and left all the money to grow in your 401k.
What is the process to secure a small business loan using the Solo 401k?
- Open a Solo 401k.
- Rollover/Transfer your retirement accounts – You can rollover your 401k, 403b, 457 retirement plan from a previous employer. You can transfer a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA and Keogh plan.
- Submit Loan Request Form – Once the retirement assets have been transferred into your Solo 401k for 5 business days, you are immediately eligible for a loan.
What are the administrative fees for a Solo 401k that has a 401k loan option?
BCM works with several Solo 401k providers, however the Solo 401k we recommend most frequently to our clients costs $0 to setup, a $15 annual fee and a $75 fee if you request a 401k loan. Through this 401k there are over 40 mutual funds to choose from ranging from conservative bond mutual funds to aggressive stock mutual funds to accommodate investors based on their age, time horizon and personal risk tolerance. Complete the form below and we would be happy to provide you with information about this Solo 401k.