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.
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