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.