QUESTION: Do you know if it is best to open a solo 401k that offers a loan feature or one that does not?
I ask because I’m a financial planner in Texas and often have self-employed clients thinking of setting up a solo 401k primarily for using the solo 401k loan feature. However, I don’t always think it is a good idea to borrow from a solo 401k because the non-borrowed funds have a better chance of growing and when you pay back the solo 401k loan it is paid with after tax funds, which will ultimately be taxed again once they are distributed from the solo 401k at retirement. Simply put, I would prefer that my clients not open a solo 401k with a loan feature so that they are not enticed to process a solo 401k loan.
ANSWER: I agree that generally a solo 401k that is invested has a better chance of generating more favorable returns, but it ultimately depends on the kind of investment. Nonetheless, under the solo 401k plan that we offer, at the time that we draft the plan documents the self-employed individual can choose whether or not to include the participant loan option. This is different from the Fidelity or Vanguard solo 401k, for example, which does not offer the solo 401k loan feature, regardless if the business owner wanted to include it in their solo 401(k) plan.
In sum, I think that it is best to open or setup a solo 401k plan that has a loan feature so in the event the self-employed individual and/or his spouse wish to exercise the solo 401k participant loan option, they may do so.
Jason L. CFP in Texas