Top Self-Directed 401k Participant Loan Questions

Do all retirement accounts allow for participant loans?

While participant loans may be taken from self-directed 401k plans, not all plans allow for them, so make sure to check with your self-directed 401k plan provider.  Also. participant loans cannot be processed from Traditional IRAs, Roth IRAs, SIMPLE IRAs or SEP IRAs.

Is there a maximum that I can borrow?

The maximum that each self-directed 401k participant can borrow from their respective balances under the plan is lesser of 50% , or $50,000. For example, if each spouse participates in the plan and each spouse has at least $100,000 in their participant account, each can separately borrow $50,000. However, for 2020 due to the coronavirus  each participant can borrow $100,000 from their self-directed 401k plan if the participant loan is processed between March 27, 2020 (the date of the CARES Act) and December 31, 2020.

Can I process multiple participant loans?

Yes but they are aggregated.  If you have any outstanding participant loans a calculation has to be performed so that the $50,000 overall limit is not exceeded.

How much time do I have to repay the participant loan?

The loan is generally paid over a 5 year period unless the borrowed funds are used toward the purchase of a primary residence. The loan must be paid back in equal monthly or quarterly payments of principal and interest.

How do I make the participant loan payments?

The loan is paid using personal funds, and the payments are made by check or by wire into the self-directed 401k bank/brokerage account.

Should I take a loan from a self-directed 401k plan?

You will need to look at your particular financial situation (both short term and long term) when deciding to take a loan from your 401k plan. Loan’s from the plan don’t required a credit check, it is not a taxable event as long as the loan is paid back, and the interest along with the principal go back to the plan-not the bank or credit union.

What happens to my loan if I close out the self-directed 401k plan?

When the plan is closed, the outstanding loan must be paid back. If you can’t pay back the loan, it can be offset which would allow you to treat it  as a rollover to an IRA provided you have the balance in your self-directed 401k plan to cover the outstanding participant loan amount.  VISIT HERE, to learn more about the participant loan offset rules.

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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