The IRS solo 401k loan signals

A recent webinar put on by the Internal Revenue Service  provides hints surrounding possible scrutiny of solo 401k loans that fall out of compliance.  As such, it is important to understand the solo 401k loan rules throughout the entire solo 401k loan process (i.e., at beginning, during and end of the solo 401k  loan process). 

Key Takeaways from the September 4, 2014 IRS Webinar:

Owner-employee loans (e.g., Solo 401k loans) are likely to be subject to a higher level of expectation and scrutiny by the IRS.

As such, it is very important to select a Solo 401k provider that is well-versed in the 3. applicable rules and can provide compliance support for the ongoing maintenance of the plan including Solo 401k loans.

To lean more about the requirements applicable to Solo 401k loans, please click here.

Solo 401k Loan Facts

The Solo 401k loan term can be more than 5 years not to exceed 15 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.

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

Solo 401k loan payments are made either monthly or quarterly

The interest rate for loan is either: A certificate deposit rate plus 2 percent or the prime 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 Documentation:

Solo 401k Loan AgreementSolo 401k Loan Application

Solo 401k Loan Payment Amortization Schedule