Loan solo 401k to my spouse for Farm equipment

I need to figure out the best way to handle this.

I am getting ready to fund my solo 401k trust.

Question One: Once I fund it, I understand that I may then borrow 1/2 of it back for a personal loan, is that correct?

ANSWER: Known as a solo 401k loan, as the solo 401k participant you may borrow 50% of your solo 401k balance not to exceed $50,000. For example, if the balance of your solo 401k is $200,000, the maximum that you can borrow is $50,000. On the other hand, if, for example, the balance in the solo 401k is $60,000, you may only borrow $30,000.

Question One Continued: If so, how do I go about doing that?  do I have to pay back interest to the trust and at what rate?  is there a deadline for repayment etc?

ANSWER:  Click on Solo 401k Loan rules to learn the whole process. Essentially, we have to prepare the solo 401k loan documents, the loan payments consist of principal and interest, and must be paid back either monthly or quarterly over a 5 year period. If the solo 401k loan proceeds will be used towards the purchase of primary residence then it can be paid back over a 15 year period.

Question Two:  Instead of doing a personal loan to myself, is it possible for my husband (who is set up as an employee) to borrow from my 401k in the form of a note?  If so, how much is he able to borrow?  The reason I ask is because besides working for my business, my husband is a farmer and he needs to purchase some equipment before year end.  It would be nice if he could just borrow it from my 401k.

ANSWER: No your husband may not borrow from your solo 401k funds as he is a disqualified person with respect to the solo 401k. However, since he is also employed through the self-employed business sponsoring the solo 401k, he can also borrow from his own solo 401k funds; therefore, if he transfers funds from other retirement funds into the solo 401k (in which case a separate bank account or brokerage account would need to be setup to hold his funds), he can also process a solo 401k loan from his solo 401k account because the IRS solo 401k loan rules apply separately to each solo 401k participant.

Question Three:  On the purchase of farm equipment, would it be possible to for the 401k Trust to purchase farm equipment as an investment and then rent the equipment back to my husband.  In addition, my father in law is a partner with my husband in farming so he could always rent the equipment in his name if necessary.  Is that possible?

ANSWER:  No the solo 401k may not invest in farm equipment directly. However, the solo 401k can process a promissory note investment to a father-in-law. However, in your particular case it would be prohibited if the father-in-law then rented the asset for which the promissory note funds were used for to your husband since he is a disqualified party. This is commonly referred to as a round-about transaction.

Thanks in advance for your help!

Daniel in Kansas

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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