My wife and I each have personal/ participant loans against our respective solo 401Ks that we would like to repay.
Loan Payoff QUESTION :
Is there a procedure that I need to follow to repay these solo 401k loans?
ANSWER:
- While prepayment penalties do not apply to solo 401k participant loans, when paying off the solo 401k participant loan early make sure not to overpay or underpay the loan.
- To determine the solo 401k loan payoff balance, look at the balance listed on the loan amortization schedule since your last payment. NOTE: Make sure your loan is current on all payments when looking at the “Balance” section of the loan amortization schedule.
- When processing solo 401k payoff, make the check payable in the name of the solo 401k from your personal bank account and write “Solo 401k loan payoff” on the memo section of the check.
- Deposit the solo 401k loan payoff check in the solo 401k account.
Subsequent Loan QUESTION 2:
Are there any restrictions on taking out a new solo 401k loan after we pay these loans back?
ANSWER:
- Yes the 12-month rules applies to solo 401k loans.
- 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.
- You can find language HERE taken straight from the IRS website regarding multiple 401k loans.
- However, if it has been 12 months since you paid back the previous solo 401k loan, then you can borrow the maximum loan amount which is 50% of your account balance not to exceed $50,000.
Early Loan Payoff QUESTION :
If I pay off the loan I took from my Solo 401K do I pay all of the payments remaining with their interest or do I need to pay less since there isn’t interest being paid for the full loan length?
ANSWER:
You would look at the loan amortization schedule and based on the payment schedule you would look to the column on the far right and it would tell you what the outstanding balance is.
If you pay off that amount the loan would be paid off and no additional payments would be due because interest does not accrue anymore after loan has been completely paid off.
For example if you make regular payment on February 28 for $1,456.14 and you have been current to date on the loan, the outstanding balance after that payment is made would be $8,295.92.
If you make a lump sum payoff of $8,295.92 the loan would then be paid off.
