How Can You Get a Solo 401k Loan?

solo 401k loan

Solo 401k loan

Financial hardships are an integral part of every business and every business owner has to deal with financial crunches. So, does it make sense to invest in a retirement plan? Well, it certainly does because you can avail solo 401k loan from your retirement savings. Solo 401k plan allows you to borrow money from your retirement fund and the accumulated money is considered as collateral.

  • Maximum borrowing amount of $50,000 or up to 50% of accumulated amount
  • Payback period of 5 years or less
  • At least quarterly payments required for repayment
  • Interest rate of Prime Rate + 1%

What is the procedure for Solo 401k loan?

Solo 401k founder/participant can borrow loan without any financial penalty or tax. If you are planning to borrow from your 401k account, prepare proper loan documents for the required sum of money and apply for a loan. The best part of a solo 401k loan is the absence of any penalty; however, you have to make the payments within the time limit. You can use this money for any purposes including funding for your business, real estate investment, tax liens or funding a new business.

Why solo 401k loan is better than bank loans?

The past few years have seen hardening credit parameters and it has become difficult to get a loan from financial institution, especially if you are self-employed. With a solo 401k borrowing option, you are temporarily taking money out of your plan without any tax liability or penalty. In addition to it, bank loans will charge a higher rate of interest and considering your financial situation, you could end up paying higher than average interest rates. In case of solo 401k borrowing, you will be paying an interest rate of Prime rate plus one percent, which makes it affordable.

Any loan borrowed from financial institution has to be spent in a pre-defined manner. You cannot use it as per your requirements and you have to show the proof to the banking institution. On the contrary, you can use solo 401k loan for any purpose whatsoever. You can use it for repayment of debt, real estate investment, third-party investment, emergency fund, use it in tax liens or similar investment or use it for any purpose. You don’t have to seek permission for spending the money. All of these factors make solo 401k loan better than any loan and that too at a lower rate of interest.

Why Solo 401k is the Best Retirement Plans for Self Employed Physicians

retirement plans for self-employed

Retirement plans for self-employed

The IRS considers many physicians as independent contractors, including physicians who work part time and emergency physicians.

As independent contractors, these physicians then are not included in any hospital sponsored 401k plan, among other full time employee’s benefits. Therefore, emergency physicians and part time physicians will have set up self-employed retirement plans for themselves. The good news is, they will be able to choose a Solo 401k, which is considered one of the best retirement plans for self-employed individuals.

The benefits of a Solo 401k plan

A Solo 401k plan is much like a hospital-sponsored 401 k plan, with the same rules and regulations applied. However, with a Solo 401k, the account holder and perhaps their spouse are the only plan participants allowed. This means contribution can only come from you and your spouse, but then you will be the one who can take full control of the plan.

Solo 401k plans are attractive because of its high contribution limit. An independent physician will be able to contribute up to $56,500 annually, including both salary deferral contribution and profit sharing contribution.

Also, with a self directed account, the account holder can also act as the trustee of the plan and can choose from many more investment choices. Not all physicians are financial experts with extensive knowledge of the stock market. With a self directed 401k, however, physicians can choose to invest in real estate, precious metals, or even private businesses.

How to set up a Solo 401k?

In order to start making contribution next year, an account holder has to set up the Solo 401k by December 31 of this year. You can either set up a new Solo 401k, or roll over your existing IRA if needed.

With a Solo 401k, you can also have a Roth type account or a Roth sub-account. With this option, physicians can pay tax upfront on their contribution amounts and let the money grow tax-free.

Once the account is set up properly, there is little administrative work required. For accounts under $250,000 in assets, account holders will not have to file a tax return form. Once you pass that threshold, filing tax is also quite simple and your plan provider can assist with that.

Overall, Solo 401k is the best retirement plans for self employed physicians because it is truly designed for their benefits. With no other plan participant, the retirement account is very flexible with high contribution limit and less administrative work required.

 

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Solo 401k Rules: What are prohibited transactions and disqualified persons?

Solo 401k Rules- Prohibited transactions in solo 401k

Solo 401k Rules- Prohibited transactions in solo 401k

One of the best features of solo 401k plans includes flexible investment options for your money. You can invest in real estate, banks CDs, foreign currency, tax liens, private funding and similar options. In short, you can grow your money as per your will and understanding of the investment opportunities.

However, there are certain transactions that are classified as Prohibited transactions in solo 401k plans. If you are planning to invest your retirement savings, it is important to have an understanding of solo 401k rules.

What are prohibited holdings in ssolo 401k plans?

Unlike the restricted investment options in regular retirement plans, solo 401k plans allows you to invest in a wide variety options. The only restriction put by IRS is on life insurance contracts and collectibles including antiques, artwork, stamps, ancient coins and similar collector items. Your Solo 401k custodian will inform you about these restrictive investments and possible investment opportunities.

Prohibited transactions: Prohibited transactions are the ones that are carried out between the solo 401k policyholder and other disqualified person. Further, any transaction that offers financial benefit to a disqualified person falls under this category.

For a better understand of prohibited transactions, it is important to understand the concept of disqualified persons in solo 401k plan.

Solo 401k Rules: Who are disqualified persons?

IRS has setup some basic rules to avoid misuse of solo 401k plans. First, the plan holder should not receive any financial benefit from the investment such as you cannot live in a rental property purchased through the IRA. Similarly, any transaction done between the solo 401k plan and the plan holder or disqualified person is classified as a prohibited transaction.

List of Disqualified Persons

  • solo 401k holder and spouse of the holder
  • Descendants of the solo 401k holder including children, grandchildren and their spouses
  • Parents or grandparents of the solo 401k holder
  • Investment managers or advisers
  • Any trust or corporation with more than 50% ownership of a disqualified person
  • Anyone offering direct or indirect services to the solo 401k

Transactions that are carried out between the solo 401k plan and disqualified persons fall under the category of prohibited transactions. Some of these transactions include:

  • Sale, lease, or exchange of property between disqualified person and solo 401k plan
  • Furnishing services, good or assets between disqualified person and solo 401k plan
  • Use of fund money for the personal benefit of solo 401k holder
  • Lending or transferring money to disqualified persons from the plan

There are some additional transactions that are labeled as prohibited by the IRS. Make sure to understand these transactions before investing through your solo 401k plan. These solo 401k rules allow appropriate use of your retirement fund. After all, your retirement fund should benefit you after your retirement instead of using it upfront.

Top Five Questions about Participant Loans for Self Employed 401 k Plans

Self employed 401 k plans

Self employed 401 k plans

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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Self Employed Retirement: Building Efficient Retirement Plans for Individuals

Retirement plans for individuals

Retirement plans for individuals

The United State of America has become a country with an increasing number of freelancers, consultants, and independent contractors. Flexible work routine, control over work hours, and ownership of the profit are some of the benefits of self-employment. However, self-employed individuals do not enjoy the retirement benefits of a job and they have to take care of all the financial necessities that come along with retirement. If you are self employed and looking for retirement plans for individuals, here are some tips to get started.

Invest in Retirement Plans for Individuals

Have you invested in solo 401 k or SEP IRA plans? Being self-employed comes with financial responsibilities and it is important to choose a retirement plan as soon as possible. For individuals looking to boost their retirement savings, Roth IRA is another excellent option and it offers tax-free retirement money.

Under Roth plans, your investments are not exempted from tax; however, you will be able to enjoy tax-free savings at the time of withdrawal. It is possible to borrow money from Roth plans for emergencies and after 59 ½ years of age; you can withdraw funds without any financial penalty. You can invest up to $5,500 against your Roth plan and the investment limit goes up to $6,500 for individuals above 50 years of age. It is best to consult a retirement expert and ensure financial security for your retirement.

Emergency Fund for Healthcare

Everyone needs healthcare and many people required additional care during retirement. It is extremely important to maintain good health and one should try to stay fit as much as possible; however, one should not ignore the need of medical care during retirement years. If you are planning to retire in the next few years, it might help to get an estimate of your healthcare requirements and evaluate your income streams accordingly.

One of the most important things to do is to sign up for Medicare as early as possible. Timely participation into Medicare would help you reduce your premiums and extend coverage limit. You should visit government hospitals and find out the cost of medical support and deductible costs during hospitalization. Having an idea of these expenses will help you choose retirement plans for individuals accordingly and arrange additional funds for these deductibles. In the end, make sure to work as long as possible because your working period and total income earned will decide the amount of your social security check.

Four Principles of Successful Investing with Self Employed Retirement Plans

Self Employed Retirement Plans

Self Employed Retirement Plans

Most people think of retirement plans as saving funds with tax benefits, and ignore the fact that they are investment funds. With self employed retirement plans, account holders should look beyond maintaining the account and instead look to grow and maximize the fund. These are four principles that will help you make better investment decisions:

1. Start saving and investing immediately

Obviously, before you can invest with your retirement plan, you have to put money in it first. With self employed retirement plans, the contribution limit is quite high at around $51,000 per year for an Individual 401k or an SEP IRA. So make sure you know the maximum contributions available and start saving immediately. The earlier you start saving and investing, the more you will benefit from compounding returns on your investments.

2. Take long term investments over short term ones

As it is your retirement at stake, so look forlong term investments that are less likely influenced by volatile market trends. Keep in mind that some self employed retirement plans have more flexible investment choices than other. For example, with a self-directed individual 401k, account holders are allowed to invest in real estate, which is often seen as a long-term investment that requires little trading over the years.

Long term investments with less trading will also save you on transaction fees on self directed accounts, or custodian fees on brokerage based accounts.

3. Decide on your investment portfolio

A lot of retirement plans are built upon target date funds, which offers high security but very low return. This may work for older account holders, who are looking to keep the fund safe closer to their retirement date. However, younger account holders may want to look at other options with much higher return. Because of the compounding rate, a small increase in return now can add up to a big amount when you start receiving distribution from the plan years later.

4. Become an educated investor

For self-directed 401k accounts, account holders are able to choose between many different assets, ranging from traditional stocks and bonds to real estate and precious metals. In these cases, it is best for account holders to consider the types of assets they know best.

For other type of self employed retirement plans, although the choices of investments are limited, account holders can still learn more about options available to them and decide if their portfolio is the best available.

 

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Qualified Pension Plan: Why self-employed women need to start saving early?

Qualified pension plan

Qualified pension plan

Self-employment offers the freedom to work for yourself and develop potential career prospects. Are you an independent working women? Saving for retirement is equally important for both men and women. If you have not been saving well for your retirement, here are some important things that you need to consider while choosing a qualified pension plan.

Important retirement facts concerning self-employed women

Some important facts came up in the 11th Annual Transamerica Retirement 2010 Survey conducted by the Transamerica Center for Retirement Studies. The survey highlighted that a majority of women lost their confidence in retirement savings and they were comparatively less optimistic towards their financial improvement during retirement. Some key findings of this survey are:

  • 29% of the employed women plan to work longer than male counterparts
  • 61% women dropped their rate of spending since the recession
  • 45% women are saving less after recession
  • Only 6% women are confident about a comfortable retirement

In addition to these factors, women spend nearly 11.5 years out of workforce and they outlive men by at least 5 years. All of these factors together highlight the need of a well-thought retirement plan.

Choose the Best Qualified Pension Plan for Self Employed

There are several retirement plans available for the self-employed and you can choose one according to your financial requirements.

Solo 401 K Plan

When it comes to the best qualified pension plan, solo 401 k is among the best because of the dual contribution feature. One can contribute up to $17,500 as part of salary deferral contribution, plus they can also make profit sharing contribution with the maximum combined contribution of up to $52,000 under employer income percentage. In addition to the higher contribution limits, solo 401 k allows multiple investment options including real estate, bonds, bank CDs, foreign currency, precious metal, tax lien, and similar options. Solo 401 k allows you to borrow money from the plan and it can be crucial during financial crunches.

SEP-IRA

Simplified Employee Pension is an exciting retirement plan for self-employed individuals and you can keep putting in up to 25% of your total business income (maximum $52,000). Contributions to SEP-IRA are tax deductible; however, it can be costly if you have employees because you need to make equal contribution to their retirement funds as well.

In addition to these plans, you can choose among defined benefit plans, SIMPLE IRA and Keogh Plans. It is important to evaluate these retirement options and choose one accordingly.