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Solo 401k Loan FAQ – How is interest rate determined for solo 401k loan?
QUESTION:
If a take a solo 401k loan, how is the interest rate determined and who is the interest paid to?
RESPONSE:
Great question as one of the top reasons that clients set up accounts with us is the ability to take a solo 401k loan.
We prepare the loan documents as part of our services for no additional charge.
When a solo 401k owner/participant takes a solo 401k loan, the proceeds of the loan are transferred from the Solo 401k account to the personal account of the solo 401k owner.
The terms of the loan are equal monthly or quarterly payments of principal and interest with the payments spread over a 5-year term (unless the proceeds of the loan are use to purchase a primary residence in which case the term may be longer).
The interest rate is either (i) prime interest rate plus 1% or (ii) a CD rate plus 2%.
When using a CD rate plus 2%, the rate needs to be competitive with the current prime rate.
