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.