Self-Directed 401k Loan --Maximum Allowable Interest?

[Ken Sanders]

I'm looking to take out a loan from my self-directed 401k, but I'm curious as to what interest rate to charge myself. I actually want to charge myself as much interest as possible since I'm not planning on contributing anything to the 401k this year. Anyone know if there is a maximum allowable interest rate and, if so, what it is?

Also, I have several different investments in my 401k in addition to cash. My plan documents state that I can borrow $50k or 1/2 of the vested balance, whichever is less. Does the vested balance include the value of my investments. Or, is it simply the amount of all of my contributions to the plan since its inception?

[Will Barnard]

Originally posted by Michael K.:

Bruce M. I have the answers you need.

I was trying to find a way to loan myself from my SD IRA or a solo 401K a lot more than 50K.

These transactions can be made with yourself but with the use of LLC's and your Self-Directed IRA cannot under any circumstance become more than a 49% owner of any LLC, or business you invest in.

Here is an example of how this works.

If you own the current rental properties in an LLC and you are the 100% owner of the LLC you can legally sell 49% of the LLC company to your SD IRA and raise funds that way.

Since the SD IRA is set up FBO Bruce M. and the LLC is in place than the transaction that takes place is between the SD IRA and the LLC. However when you do this all costs of the rental properties and profits must be split accordingly between the SD IRA and the LLC.

Lastly a SD IRA is far superior than a Solo 401k because of the tax advantages on the back end being Tax Free.

Let me know if you have any other questions.

All of the above is completely inaccurate. Your SDIRA or solo 401k plan can not buy ANY property, or portion thereof, from yourself as YOU are a disqualified party to the plan.

You can "partner" with your plan, but the rules and steps are complicated and if not done exactly right, you risk executing a prohibited transaction.

Lastly, a SDIRA is NOT far superior to a 401k plan "because the tax advantages on the back end being Tax Free." - as this statement is false. ONLY in a ROTH IRA are the back-end profits tax free and you can certainly set up a ROTh 401k. So, to be clear, there is no tax free profits in a self directed or traditional IRA UNLESS it is a Roth and 401k plans are far superior to IRA plans (both traditional and Roth) because the 401k offers borrowing provisions, offers larger contribution limits, and in some cases, avoids UBIT where the IRA would not. Clearly, the 401k option is the better of the two so if you have the ability to have a business without any employees other than your spouse, go for the roll over into a new solo 401k plan.