Can You Lend Money from a SOLO 401k?

One of the most frequently asked questions received by My Solo 401k Financial is: Can you lend money from a Solo 401k? The short answer is yes — but the details matter enormously, and the question is typically asked for two very different reasons. Some Solo 401k plan owners want to know whether their plan can lend money to an outside party as a promissory note investment. Others want to know whether they personally can borrow money from their own Solo 401k through a participant loan. These are two fundamentally different transactions with different rules, different IRS regulations, and different compliance requirements — and confusing them can have serious tax consequences. This post covers both in full detail.

Watch: My Solo 401k Financial explains the two ways a Solo 401k can lend money — promissory note investments and participant loans — and the critical rules for each.

Two Very Different Ways a Solo 401k Can Lend Money

A Solo 401k is one of the most flexible retirement plans available for self-employed individuals and owner-only businesses. In addition to traditional investments such as stocks, index funds, mutual funds, and ETFs, a properly structured Solo 401k also allows for alternative investments — including lending money through promissory notes. It also allows the plan participant to borrow from the plan through a participant loan.

These two transactions are frequently confused, yet they are governed by entirely different rules:

Feature	Participant Loan	Promissory Note Investment
Who Borrows?	The Solo 401k owner/participant	An unrelated third party or business
Purpose	Personal use of funds by the participant	Investment to grow the Solo 401k plan
Disqualified Person Restriction?	Not applicable — you borrow from your own plan	Yes — cannot lend to disqualified persons
Maximum Amount	50% of participant balance, up to $50,000	No specific IRS cap — governed by plan assets and investment terms
Repayment Goes To	Back into your Solo 401k plan	Back into your Solo 401k plan
Taxable Event?	No — not a distribution if properly repaid	No — it is a plan investment; returns are tax-deferred
Plan Document Required?	Yes — plan and loan documents must allow it	Yes — plan must allow alternative investments

⚠️ Important: Basic Solo 401k plans offered by traditional banks such as Wells Fargo, Chase, and Bank of America, and brokerage firms such as Fidelity, Schwab, and T. Rowe Price, do not allow for promissory note investments or Solo 401k participant loans. Only a properly structured Solo 401k plan — such as those offered by My Solo 401k Financial — includes both of these features.

Part 1: Solo 401k Participant Loans — Borrowing from Your Own Plan

A Solo 401k participant loan allows the plan owner to borrow from their own retirement plan — without triggering income taxes or the 10% early distribution penalty at the time of the loan. This is one of the most powerful and most underutilized features of a Solo 401k.

Who Can Take a Solo 401k Participant Loan?

Only the Solo 401k participant — the self-employed individual who established the plan — can take a participant loan from their own plan. The plan must also explicitly allow for participant loans in its governing plan documents. All Solo 401k plans drafted by My Solo 401k Financial include this feature.

For two-participant plans where both spouses are self-employed in the same business and both participate in the same Solo 401k plan, each spouse must borrow based on their own separate individual account balance within the plan. Spouses cannot pool their balances or borrow against each other’s funds.

📋 Two-Participant Example:

Both spouses participate in the same Solo 401k plan.

Spouse A has a plan balance of $120,000 → can borrow up to $50,000 (50% = $60,000, but maximum is $50,000)
Spouse B has a plan balance of $50,000 → can borrow up to $25,000 (50% of $50,000)
Each loan is independent — Spouse B cannot borrow more by using Spouse A’s balance

Solo 401k Participant Loan Rules at a Glance

Loan Rule	Details
Minimum Loan Amount	$1,000
Maximum Loan Amount	50% of participant’s individual account balance, not to exceed $50,000
Multiple Plans	The $50,000 maximum is aggregated across all Solo 401k plans the participant holds
Full-Time Employer 401k Loans	A participant who also participates in a daytime employer 401k can borrow up to $50,000 from that plan separately, if the employer plan also allows loans — these are independent limits
Standard Repayment Period	5 years, with scheduled monthly or quarterly payments
Primary Residence Exception	15 or 30 years if loan proceeds are used toward purchase of primary residence; scheduled payments still required (minimum monthly or quarterly)
Interest Rate	Prime rate + 1 point (Wall Street Journal), or competitive CD rate + 2 points
Where Payments Go	Principal and interest both return to the participant’s Solo 401k plan
Payment Source	After-tax personal funds only — not business funds or Solo 401k funds
Interest Tax Deductible?	No
Credit Check Required?	No — sufficient plan balance is the only requirement
Loan Documents Required?	Yes — IRS-compliant loan agreement and repayment schedule; prepared by My Solo 401k Financial at no extra charge
Triggering Event Required?	No — a participant loan is not a distribution and does not require age 59½ or separation from service

What Happens If You Default on a Solo 401k Participant Loan?

If scheduled loan payments are missed beyond the applicable grace period — generally the end of the quarter following the missed payment — the entire outstanding loan balance is treated as a taxable distribution. This means:

The defaulted amount is added to the participant’s ordinary taxable income for the year of default
If the participant is under age 59½, the 10% early distribution penalty also applies
Federal and state income taxes become due

⚠️ Default Warning: A Solo 401k participant loan that is not repaid on schedule is no longer treated as a loan — it becomes a taxable distribution with full tax consequences. Participants must ensure scheduled repayments are made consistently throughout the loan term to preserve the tax-advantaged status of the transaction.

Part 2: Solo 401k Promissory Note Investments — Lending to a Third Party

The second way a Solo 401k can lend money is as a promissory note investment — where the Solo 401k plan itself acts as the lender, and the borrower is an unrelated third party or business. This is classified as an alternative investment made by the plan, with the goal of generating a return (interest income) that flows back into the Solo 401k to grow the retirement account.

This strategy is popular among Solo 401k owners who want to put their retirement funds to work as private lenders — earning competitive interest rates that are often higher than traditional market returns.

Who Can the Solo 401k Lend to as a Promissory Note Investment?

The borrower must be an unrelated, non-disqualified person or business. This is the most critical compliance requirement for Solo 401k promissory note investments.

Disqualified persons — those to whom the Solo 401k may not make a promissory note investment — include:

The Solo 401k participant themselves (the plan owner)
The participant’s spouse
The participant’s parents (and lineal ancestors)
The participant’s children (and lineal descendants, including grandchildren)
The participant’s business (in which they hold a significant ownership interest)
Any other party defined as a disqualified person under IRS prohibited transaction rules

⚠️ Critical Rule: The Solo 401k cannot lend money as a promissory note investment to the plan owner personally, to the owner’s spouse, children, parents, or to the owner’s business. Doing so constitutes a prohibited transaction under IRS rules — with potentially severe tax consequences for the entire plan.

Solo 401k Promissory Note Investment: Key Terms and Requirements

Requirement	Details
Borrower Must Be Unrelated	Cannot be the plan owner, spouse, children, parents, or the owner’s business
Plan Listed as Lender / Beneficiary	The Solo 401k trust name and trustee are listed on the promissory note document (e.g., “ABC Trust, [Name], Trustee”)
Loan Terms Must Be Documented	Interest rate, payment structure (interest-only with balloon, or interest + principal), and repayment schedule must all be stated in the note
Fair Market Interest Rate	Rate must be competitive and reflective of the borrower’s credit risk; typically 8%–12% for secured first-position notes; up to 15% for unsecured notes
Collateral / Security	Promissory notes can be secured (by real estate or other collateral) or unsecured; secured notes carry lower risk and are more common
State Usury Laws	Interest rate must not violate the usury laws of the state in which the loan is made
Repayment Goes Back to Solo 401k	All principal and interest payments must flow directly back into the Solo 401k plan account — not to the participant personally
Purpose of the Investment	To benefit the Solo 401k plan (generate investment returns) — not to benefit the participant, the participant’s business, or any disqualified person

Secured vs. Unsecured Solo 401k Promissory Notes

The distinction between secured and unsecured Solo 401k promissory notes:

Secured promissory note: The loan is backed by collateral — most commonly real estate, but other assets can serve as security. A lien is recorded against the collateral. If the borrower defaults, the Solo 401k can process a reconveyance and take ownership of the collateral as the secured creditor. Secured first-position notes typically earn 8%–12% interest.
Unsecured promissory note: No collateral is pledged. In the event of default, the Solo 401k has no collateral to foreclose on — recovery depends on the borrower’s ability to repay. Unsecured notes carry higher risk and typically carry higher interest rates, sometimes up to 15%, to compensate for that added risk.

💡 Best Practice: When evaluating a prospective borrower for a Solo 401k promissory note investment, review the borrower’s credit history to determine what interest rate they would receive from a traditional lender. This helps ensure the Solo 401k charges a fair market rate — and it strengthens the plan’s position if the IRS ever scrutinizes the transaction.

How to Title the Solo 401k on the Promissory Note

The Solo 401k plan — not the individual participant — must be listed as the lender and beneficiary on the promissory note document. The correct format for listing the plan on the note is:

📋 Example — How to List the Lender on a Solo 401k Promissory Note:

If the Solo 401k plan is named “ABC Trust” and the participant/trustee is John Smith, the lender line on the promissory note should read:

ABC Trust, John Smith, Trustee

This format — [Plan Name], [Participant Name], Trustee — also applies to all other types of Solo 401k alternative investments, including real estate deeds, precious metals, tax liens, and private placements.

Can a Solo 401k Make a Promissory Note to a Business Partner?

This is a nuanced question that My Solo 401k Financial addresses frequently. The answer is: possibly — but caution is required.

A promissory note to a business partner may be problematic if that loan indirectly benefits the Solo 401k participant. The IRS’s prohibited transaction rules are not limited to direct transactions with disqualified persons — they extend to indirect benefits as well. The relevant legal test is not simply whether the borrower is a relative — it is whether the loan directly or indirectly benefits a disqualified person.

⚠️ Business Partner Example:

If a business partner wants to borrow from the participant’s Solo 401k and then use those funds for a joint venture with the participant, this transaction may raise prohibited transaction concerns — because the participant would be indirectly benefiting from the promissory note proceeds. The purpose of a Solo 401k promissory note investment must be to benefit the Solo 401k plan — not the participant.

Can a Solo 401k Lend to a Real Estate Investor?

A Solo 401k can absolutely enter into a promissory note with an unrelated real estate investor — and this is in fact one of the most popular applications of the Solo 401k promissory note investment strategy.

For a Solo 401k real estate promissory note to be properly structured, it should:

Be made to an unrelated borrower — not the participant, spouse, children, parents, or the participant’s business
Be secured by real estate with a recorded lien (for maximum plan protection in case of default)
Be properly documented with a promissory note that lists loan terms, interest rate, repayment structure, and the Solo 401k plan as the lender/beneficiary
Earn a fair market interest rate consistent with the risk profile of the borrower and the security of the collateral
Route all principal and interest payments directly back to the Solo 401k plan account

💡 Default Protection — Solo 401k Real Estate Promissory Note: If the borrower defaults on a secured Solo 401k promissory note backed by real estate, the plan — as the secured creditor — can initiate a reconveyance and take ownership of the collateral property. This is why My Solo 401k Financial recommends always securing promissory note investments with real estate or other quality collateral when possible.

Prohibited Transactions: What Happens If You Get It Wrong?

The consequences of a prohibited transaction involving a Solo 401k promissory note investment can be severe — which is why reviewing any proposed transaction before executing it is critical.

Two Levels of Prohibited Transaction Consequences

Scenario	Consequence
Knowingly entered into a prohibited transaction	The IRS may treat the entire Solo 401k plan as having lost its tax-advantaged status — all plan funds become subject to taxes as if they were fully distributed in the year the prohibited transaction occurred
Prohibited transaction entered into unknowingly / by accident	Only the specific promissory note amount — not the entire plan — is treated as a taxable distribution, retroactive to the year the transaction occurred; the rest of the plan retains its tax-advantaged status

⚠️ My Solo 401k Financial Strongly Recommends: Before making any Solo 401k promissory note investment, review the proposed transaction carefully to confirm the borrower is not a disqualified person and that the loan does not directly or indirectly benefit the plan participant or any disqualified person. When in doubt, consult a qualified retirement plan professional before proceeding.

Side-by-Side Summary: Participant Loan vs. Promissory Note Investment

Factor	Solo 401k Participant Loan	Solo 401k Promissory Note Investment
Borrower	The plan participant (you)	An unrelated third party or business
IRS Classification	Borrowing from your own retirement plan	Alternative investment by the plan
Disqualified Person Rules Apply?	No — you are borrowing from your own plan	Yes — borrower cannot be a disqualified person
Credit Check?	No	Recommended — to assess borrower creditworthiness
Loan Maximum	$50,000 / 50% of participant balance	No specific IRS cap — limited by plan assets
Interest Rate	Prime + 1% or CD rate + 2%	Fair market rate; typically 8%–15% depending on security and credit risk
Repayment Term	5 years standard; 15–30 years for primary residence	Negotiated between plan and borrower; defined in the promissory note
Collateral Available?	Not applicable	Yes — secured by real estate or other collateral; lien recorded
Plan Document Required?	Yes — plan must allow participant loans	Yes — plan must allow alternative investments / promissory notes
Prohibited Transaction Risk?	Low — governed by specific IRS loan rules	High if not properly structured — review before executing
Available from Banks / Schwab / Fidelity?	No — not available from basic plan providers	No — not available from basic plan providers

How My Solo 401k Financial Supports Both Strategies

My Solo 401k Financial provides fully compliant Solo 401k plan documents that allow for both participant loans and promissory note investments — two features that are not available through basic bank or brokerage Solo 401k plans.

Participant loan documents — including the IRS-compliant loan agreement and repayment schedule — are prepared by My Solo 401k Financial as part of the annual plan support. There is no additional charge for this service.
Promissory note investment guidance — My Solo 401k Financial helps plan owners understand the prohibited transaction rules, proper titling, documentation requirements, and interest rate guidelines for Solo 401k promissory note investments.
All Solo 401k plans drafted by My Solo 401k Financial allow for the full range of alternative investments, including real estate, precious metals, private placements, tax liens, and promissory notes — subject to IRS-compliant execution.

💡 Key Reminder: The answer to “Can you lend money from a Solo 401k?” is yes — but only if the plan documents allow it, and only if the transaction is properly structured. A Solo 401k can lend as a promissory note investment to an unrelated third party, and the plan participant can borrow from their own plan through a participant loan. Both strategies require proper documentation and compliance with IRS rules. My Solo 401k Financial supports both.

💼 Ready to Put Your Solo 401k to Work as a Lender?
Whether you want to explore a Solo 401k participant loan, invest in a promissory note, or simply open a plan that allows for the full range of alternative investments, My Solo 401k Financial can help you get the right structure in place.

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Remember: This information is provided for educational purposes only. Always consult with qualified tax, legal, and investment professionals before making investment decisions with your retirement funds.