Multiple Solo 401k Loan Questions

QUESTION: I want to take a $30,000 Solo 401k loan from my self-directed Solo 401k within the next week. The current balance is over $60,000. Any problem with that? And do I need anything from you to make it official, or do we just set up a payment schedule based on prime+1% over 5 years?

ANSWER:  The Solo 401k loan rules permit the Solo 401k trustee/participant to borrow 50% of his or her Solo 401k balance not to exceed $50,000. Therefore, based on your current Solo 401k balance of $60,000, you can borrow $30,000 from your Solo 401k plan.

ANSWER: With respect to required Solo 401k loan documentation, to be in compliance with IRS and DOL regulations, the Solo 401k loan documents must contain information that clearly detail the Solo 401k loan program was intended to be in compliance with the DOL and IRS regulations.

Solo 401k Loan Agreement

The loan must be confirmed by a legally enforceable agreement (Treas. Reg. 1.72(p)-1, Q&A 3(b). According to regulations, the loan agreement must clearly identify an amount borrowed, a loan term, and a repayment schedule.

Forms

Using the following forms further contribute to a successful and compliant Solo 401k loan program:

  • Loan application form
  • Payment authorization form

As a Solo 401k provider, we prepare above Solo 401k loan documents which are in compliance with the DOL and IRS requirements.

QUESTION: Next year I will be rolling over more funds into my Solo 401k account from a former employer 401k and will want to take another Solo 401k loan at that time. Any problem with multiple Solo 401k loans in a short period, assuming the 1st one is paid off or taken as a distribution?

ANSWER: Once the Solo 401k loan is paid off, there is a restriction on the amount of the second, which is reduced by the highest balance of the first Solo 401k loan in the previous 12 months.

Here’s language taken straight from the IRS website regarding multiple 401k loans:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

  1.  Jim, a participant in our retirement plan, has requested a second plan loan. Jim’s vested account balance is $80,000. He borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan? Would it benefit him to repay the first loan before requesting a second loan?

    Jim will only be able to take a second loan if your plan’s terms allow it. You’ll find how to determine the maximum amount Jim may borrow in Code §72(p)(2)(A). The law treats the portion of the loan that exceeds the maximum amount as a distribution. Generally, any previously untaxed amount of the distribution is taxable. We’ll use the facts in your question to calculate Jim’s maximum allowable loan balance.

    The new loan plus the outstanding balance of all other loans cannot exceed the lesser of:

    $50,000, reduced by the excess of the highest outstanding balance of all Jim’s loans during the 12-month period ending on the day before the new loan (in this example, $27,000) over the outstanding balance of Jim’s loans from the plan on the date of the new loan (in this example, $18,000), or

    The greater of $10,000 or 1/2 of Jim’s vested account balance.

    Maximum second loan if amount still owed on first loan
    Jim’s current loan balance is $18,000. This amount plus the new loan cannot exceed the lesser of:

    $50,000 – ($27,000 – $18,000) = $41,000, or
    $80,000 x 1/2 = $40,000

    Jim’s total permissible balance is $40,000, of which $18,000 is an existing loan balance. This leaves a new maximum permissible loan amount of $22,000 ($40,000 – $18,000).

    Maximum second loan if first loan repaid
    Because the law bases Jim’s maximum loan on all of his loans during the 12 months prior to the new loan, there isn’t a significant advantage for Jim to pay off his first loan before requesting a second. If Jim repaid the $18,000 before applying for the second loan, he would be limited to the lesser of:

    $50,000 – ($27,000 – 0) = $23,000, or
    $80,000 x 1/2 = $40,000

    In this case, the maximum permissible loan amount would be $23,000.

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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