QUESTION – ROTH 401K LOAN RULES
I am an independent financial adviser with an Individual Solo 401k. I have approximately $80,000 in pre-tax funds and $60,000 of Roth funds in my Solo 401k. I would like to take a loan from my Solo 401k to expand my business and payoff some personal credit cards. How much can I borrow? Can I borrow from both my pre-tax and Roth sub-accounts? John, Arlington, Virginia
ANSWER – ROTH 401K LOAN RULES
The Solo 401k loan rules provide that you can borrow up to 50% of the balance of your Solo 401k not to exceed $50,000. The 50% calculation is cumulative including balances in both your pre-tax and Roth sub-accounts. In your case, you can borrow up to $50,000 given that your cumulative account balance in your plan exceeds $100,000.
If you choose to borrow from both pre-tax and Roth sub-accounts, this would be documented as two separate loans. Per IRS Publication 560: “If the loan is from a designated Roth account, the payments must be satisfied separately for that part of the loan and for the part of the loan from other accounts under the plan.” [See also FAQ regarding taking a loan from a Roth 401k on the IRS website which confirms this.] For example, you could take a $20,000 solo 401k participant loan from the Roth sub-account and a $30,000 loan from the Pre-tax sub-account.
The repayment terms of each loan would monthly or quarterly payments of principal and interest of prime plus 1% over a 5 year term.
Also, the solo 401k participant loan rules allow for the loan amount to be satisfied from just one source provided there are enough funds in that source to satisfy the participant loan amount. For example, you would be able to borrow the full $50,0000 from the Roth solo 401k designated account even if you only had $50,000 in the Roth solo 401k provided the pretax solo 401k designated account had at least $50,000 in value.