Solo 401k Loan

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Based on the total Solo 401k balance, the Solo 401k loan option can be exercised as soon as the Solo 401k bank account(s) are funded. Note that if both participants participate in Solo 401k or self-directed Solo 401k, generally both spouses or two business partners since solo 401k is for maximum of two participants, two bank accounts are required—one for each participant.  Therefore, the Solo 401k loan option is available to each Solo 401k participant, thus allowing both to combine the borrowed proceeds for any purpose. What’s more, each participant can borrow 50% of their respective solo 401k account value not to exceed $50,000. The permitted loan amount does not increase nor decrease each year like the Solo 401k contributions limits. Of course, the Solo 401k loan has to be paid back with interest—typically the solo 401k loan payment interest rate used is the WSJ Prime rate plus 1%; however, based on testimony from a Department of Labor expert, a certificate deposit rate plus 2 percent is also acceptable. Thus, in today’s economy a CD rate may be more favorable, especially if you have determined that a favorable loan payment rate may be in your best interest to avoid defaulting on the Solo 401k loan . Lastly, visit [Mclaughlin V. Rowley, 698 F. Supp 1333 (N.D. Tex. 1988)] to learn more about solo 401k loan rates.

Isn’t Lending of Money to the Solo 401k Owner Prohibited?

Yes, the Solo 401k prohibited transaction rules prohibit the “lending of money or other extension of credit between a plan and a party of interest”. However, just like most rules exceptions apply to this prohibited transaction rule.  Specifically, Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules permit each Solo 401k participant to borrow money from their respective Solo 401k tax-free and without penalty, provided the following rules are followed:

• Solo 401k loan is made in accordance with specific provisions regarding such loans set forth in the Solo 401k plan;
• Solo 401k loan bears a reasonable rate of interest (see discussion above); and
• Solo 401k loan is adequately secured—for example, if the participant borrows 50% of the current Solo 401k value, up to 50% of the account balance will serve as security for the loan. Visit Department of Labor Reg. 2550.408b-1(f)(2) for more on this.

Uses of Solo 401k Participant Loan

 No restrictions apply with respect to the use of the Solo 401k loan proceeds. Simply stated, Solo 401k loan proceeds can be used for any purpose as long as the Solo 401k loan rules are followed. Following are some common uses of Solo 401k loan proceeds:

·         Purchase or renovate primary residence

·         Save primary residence from foreclosure

·         Pay credit card debt

·         Vacation

·         Business expenses

·         Investing outside Solo 401k

·         Help out a friend or family member

·         Any reason that you see fit