Solo 401K borrow money

[David Yu]

I'm confused.  Can you borrow money from solo 401k for personal use?  I understand like buying your primary resident.  Can you take a personal loan?  Personal loan can be buying a car or anything personal like that right?  Just not to fund your business?

Thanks!

[Mark Nolan]

@David Yu

Unlike an IRA where the rules do not allow for participant loans, yes the 401(k) participant loan rules allow the individual to use the loan proceeds for any purpose including for funding your own business. The loan term is five years with payments made monthly or quarterly. However, if the proceeds are used for the purchase of your primary residence, the loan can be extended for as long as 30 years.

As the trustee/participant of your own 401k plan, you can take a loan/borrow from your solo 401k for any reason.

• The Solo 401k loan term is 5 years for general loans.

• The Solo 401k loan term can be more than 5 years not to exceed 30 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.

• Solo 401k loan payments are made either monthly or quarterly

• The interest rate for solo 401k loan is either: A certificate deposit rate plus 2 percent or theprime rate plus 1 percent.

• Solo 401k Loan payments are fixed payments consisting of interest and principal

• Solo 401k loan rules do not allow for Interest only payments or principal payments only.

• The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.

– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)

– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K

– The minimum Solo 401k loan amount is $1,000.

• The Solo 401k rules require the following proper Solo 401k loan documentation:

– Solo 401k Loan Agreement

– Solo 401k Loan Application

– Solo 401k Loan Payment Amortization Schedule

The following IRS link covers the 401k loan rules. 

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans