A big advantage of having a Solo 401k account is that account holders have the option to borrow money from the plan. This option sounds good in theory, as it provides a resource for emergency needs. However, in reality, many account holders shy away from this option because they don’t understand the loan regulations and requirements. Borrowing from a self employed retirement accounts can be more simple than you expected. Let’s take a look at the most commonly asked questions about Solo 401k participant loan.
Question #1: I heard that all self employed 401 k plans allow borrowing from the plan, is it true?
Answer: Although it is true that IRS allow account holders to borrow from their Solo 401k, not all providers offer loan option. Some providers allow loan options, but will not prepare the necessary paperwork required. So make sure to find a good plan provider who can help you facilitate the loan application when needed at no extra charge.
Question #2: What can I use the borrowed amount for?
Answer: The unique thing about borrowing money from self employed 401 k plans is that you can use the borrowed money for any purpose at your discretion. As long as the loan and interest are paid back, you are free to borrow money for any personal needs, even to pay off credit card debts.
Question #3: How much can I borrow from the plan?
Answer: A Solo 401k plan allows its account holder to borrow up to $50,000 or 50% of the account balance, whichever is lower.
Question #4: What are the costs of borrowing from self employed 401 k plans?
Answer: Account holders are responsible for paying back the loan amount plus interest rate, which is prime rate plus 1%. Keep in mind that this interest rate will also be paid back into your retirement account.
Also, some plan providers will charge a fee to set up the loan application, so check with your plan provider first.
Question #5: What are the requirements for repayments?
Account holders are required to pay back both the principal and interest amounts within 5 years. Also, payments should be made at least quarterly in roughly equal amounts.
To determine your payment schedule, try using our Solo 401k loan calculator.
In general, it is advisable to keep your money invested on a tax-deferred basis with a Solo 401k. However, when in needs, having a loan option can be a great financial help. For example, if the account holders have credit card debts that come with hefty interest charges, it will make sense to borrow money from their Solo 401k to pay off the debt, and then pay back the loan with a much lower interest rate.
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