My Solo 401(k) Can Loan Money to Me?
By Jordan Sheppherd
There are a lot of great things about the Solo 401(k), but one of most convenient is the fact that you can take a loan from it. You can’t take a loan from your IRA, as that would be considered self-dealing; however 401(k)s are given an exemption in the tax code for loans. Think of it as the one exception to the self-dealing rule for 401(k)s.
A common question we get from existing Solo 401(k) clients, as well as from prospective clients that are thinking about setting up a Solo 401(k), is about the loan amount. How much can you loan yourself?
The rules are that you can loan yourself up to 1/2 your plan’s value, up to $50,000. So, irregardless of how much you have in the plan, you can’t ever loan yourself more than $50,000.
What if your Solo 401(k) has two people in it though – you and your spouse? How do you figure the loan maximum then? The 1/2 your plan’s value, up to $50,000 rule, applies only to your money in the plan, not anyone else’s. So as an example, say we have Joe and Cindy. They have a Solo 401(k) that they both participate in. Joe has $74,000 in the plan, and Cindy has $150,000.
If Joe wanted to take a loan from the plan, he would need to figure the loan amount based on his money in the plan, or $74,000. Using the rule above, he would qualify for a $37,000 loan which is half of his $74,000 in the plan.
If Cindy wanted to take a loan from the plan, she would qualify for the full $50,000 amount, because she has $150,000 in the plan. Half the value of her part of the plan is $75,000, however she’s limited by the $50,000 rule, so she’ll max out at $50,000 for her loan.
When figuring the maximum loan amount from a Solo 401(k), make sure you’re figuring off of your money in the plan, and not someone else’s.
Some basics requirements of a Solo 401(k) loan:
- The loan cannot exceed 50% of the value of your 401(k), or $50,000
- The term of the loan cannot exceed 5 years, unless 100% of the loan proceeds are used to purchase your primary residence, in which case the term cannot exceed 15 years
- Payments may be made monthly or quarterly
- Payments must be amortized payments – no interest-only payments
- The interest rate must be within the rate range established by the Dept. of Labor. The lowest rate would be a comparable CD rate plus 2%. The highest rate would be the prime rate plus 1%.
- The loan cannot be for less than $1,000