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Loans from your 401k: a How-To Guide

(Or How to use your Solo 401k as a personal bank)

Wouldn’t it be great if you could borrow cash from your IRA with ease whenever a sudden opportunity or challenge presents itself?

Unfortunately, this isn’t an option for most retirement plans.

Unavailable to plan owners with a self-directed IRA or other similar retirement plan, personal loans are a valuable benefit, one which you only get access to with a Solo 401k plan.

But I know what you’re thinking, “That sounds nice...but borrowing money is probably a hassle.”

Luckily, using your Solo 401k as a personal bank is easier than you might think. Paperwork is minimal and interest rates are low (in fact, you set the interest rate), making taking a loan from your Solo 401k
both convenient and practical.

But just how convenient and practical? Taking a loan from your Solo 401k is:

  • Super quick: It takes minutes to process a loan request.
  • Easy and reliable: There’s no approval process for taking out a loan on your Solo 401k. You’re instantly approved for up to $50,000 or 50% of the account value (whichever is less at the time of the loan request).
  • Practical and flexible: You (yes, you) set the interest rate. Take up to 5 years to pay the loan down with the flexibility of quarterly payments if desired.
  • And you can use the loan funds for anything, including both business and personal expenses.

In all, taking a loan from your Solo 401k plan has several great benefits, being both easy and highly flexible. Now, let’s talk about how to take a loan from your Solo 401k plan.

How to take a loan from your Solo 401k

Taking a loan from your Solo 401k is easy, but there are a few steps and some useful tips for making sure you do it right and take full advantage of Solo 401k participant loans:

1. Make sure your Solo 401k allows personal loans

Before continuing, make sure your Solo 401k plan contains loan provisions that allow for plan participant loans (if you have your Solo 401k with Maverick, we’ve got you covered already).

Most large financial institutions do not offer personal loans with their Solo 401k plans. With the removal of plan funds being disadvantageous for the institution, they choose not to offer the personal loan option.

In fact, they don’t offer many of the more desirable features of a Solo 401k plan. All of which you get with a Maverick Solo 401k at no additional charge.

2. Process the loan request + Complete loan agreement

Once you’ve confirmed that your Solo 401k allows personal loans, you’re ready and able to process a loan request. In most cases, this simply involves contacting your account holder and requesting a loan, with necessary paperwork being provided for you by them.

The loan should be completed with a legally enforceable loan agreement which includes:

  • The loan amount
  • The loan term
  • And repayment schedule

The process for requesting a loan from your Solo 401k will be slightly different depending on where you have your account, but the process is generally very simple and you’ll have a response in little time.

3. Set your interest rate

As a part of taking out a loan on your Solo 401k, before finalizing the loan you need to set the interest rate you’ll be charged on it. Yes, you heard right, you set the interest rate.

However, keep in mind that the interest rate does need to be considered reasonable, a term which the IRS doesn’t exactly clearly define.

In other words, you can’t opt to put 0 or 1% down. Unfortunately, that won’t fly.

The interest rate must parallel the interest rate which is charged by commercial lenders for similar loans. Generally, as a simple and easy guideline, this is considered the prime rate plus 1 percent.

Also, keep in mind that interest is set each time you take a loan out on your Solo 401k. You can’t set an interest rate now and keep it through all proceeding loans.

Avoiding taxes on your Solo 401k loan

It’s important to make sure that certain guidelines are adhered to so that you can avoid paying taxes at the time your loan is taken out.

Ugh, I know. This isn’t the fun part. However, don’t worry because these 3 guidelines are all very clear and easy to follow.

As long as you adhere to each of the below guidelines, you’re in the clear and can take out a loan from your Solo 401k tax-free:

  1. Have a proper, legally enforceable, loan agreement completed and make sure the loan amount fits with IRS guidelines (up to $50,000 or 50% of account value, whichever is less).
  2. The loan must be paid with level payment amortization of principal and interest, which simply means you’re making regular payments (at least quarterly) that include a good balance of each payment going towards both the loan principal and interest. Regular payments going mostly towards principal or a large lump sum payment dropped at the end of the loan repayment window are both examples of what not to do.
  3. And lastly, the loan must be paid in full within 5 years. The one exception to this is if the loan is used to purchase a principal residence, in which case you can extend the repayment period to up to 15 years.

That’s all there is to it. If you’ve got your properly filled loan agreement, are making payments which are going towards a good balance of principal and interest, and repay the loan within 5 years then your loan will remain tax-free.

(And as you probably guessed, if you use a Maverick Solo 401k we've made this process dead simple by putting it all online.)

What can a Solo 401k loan be used for?

So, what can you use a Solo 401k loan for?

There are no guidelines here, so you’re allowed to use a Solo 401k participant loan for any purpose you’d like whether that be personal use or business.

Examples of potential uses include:

  • Covering business expenses
  • Funding a new business
  • Paying off a mortgage
  • Paying off debt such as a credit card
  • Personal expenses
  • Recreational spending such as a vacation

Get the power and flexibility of unrestricted personal loans with a Solo 401k

With no approval process, flexible payment guidelines, no restrictions on loan use, and super quick loan requests Solo 401k loans are a valuable feature for those looking to make the most of their retirement plan.

So, if you’re ready to begin taking advantage of the many benefits of a Solo 401k, including the convenience, flexibility, and utility of personal loans, click here to set up an account.

And if you have any questions at all, contact us here and we’ll be more than happy to help.

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