SOLO 401(K) LOAN EXPLAINED

401(k) participant can borrow up to either $50,000 or 50% of their account value, whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no less than quarterly. The interest rate must be set at a reasonable rate of interest, generally interpreted as prime rate + 1%. As of 9/1/13 prime rate is 3.25%, which means participant loans may be set at very reasonable Interest rate. The interest rate is fixed based on the prime rate at the time of the loan application.

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When can a Participant Loan be useful?

The Solo 401(k) plan is a perfect structure for any self-employed business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401(k) participants can borrow up to either $50,000 or 50% of their account value, whichever is less, to help finance or operate their business.

 

Other useful ways of using the participant loan feature

• Lend the funds to a third party who will pay a higher interest rate

• Invest in a real estate project that offers a higher rate of return than the low interest rate you must pay

• Consolidate debt

• Pay for college expenses

• Pay for unexpected emergencies

• Avoid distribution penalties and use up to $50,000 immediately with no restrictions

• Invest in a new franchise or business

• Make any alternative investment that will generate a higher rate of return than the low interest rate imposed on you, such as tax liens, private placements, or mortgage pools

• Invest in a transaction that would otherwise be a Prohibited Transaction under Internal Revenue Code Section 4975

• Have quick, easy, and cheap access to a $50,000 loan to be used for any purpose