QUESTION:
I am looking for ways to pay down my home mortgage. I do have investments in my solo 401k that I could liquidate and then take out a solo 401k loan that I would pay back within 5 years, for instance. The loan amount would be $50k as mentioned in our earlier email exchange. I also have another 401k plan from my day job. Is there any reason I can’t just transfer some of the money from my 401k with my employer to my solo 401k account that I have from my sidegig? That way I would not have to liquidate my other investments already part of the solo 401k account.
ANSWER:
Yes, a former employer 401k may be transferred to the solo 401k and then you can borrow from the solo 401k plan (solo 401k participant loan). Once the former employer funds and even IRAs are transferred to a solo 401k plan, they now fall under the rules of the solo 401k plan and the solo 401k plan allows for participant loans as long as they meet the plan’s rules, such as the following:
Following are some quick facts regarding the solo 401k participant loan rules.
- Each participant can borrow from the solo 401k provided each has a solo 401k balance; however, the solo 401k loan calculation is based on each solo 41k participant’s respective loan balance–not the entire value of the solo 401k plan.
- The solo 401k loan does not affect your personal credit or business credit score because you are borrowing from the solo 401k plan; therefore, there is no credit check.
- The Solo 401k loan term is 5 years for general loans.
- The Solo 401k loan term can be more than 5 years not to exceed 15 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.
- Solo 401k loan payments are made either monthly or quarterly.
- Solo 401k annual contributions from self-employment income cannot be used/applied towards payment of solo 401k participant loans.
- Solo 401k participant loan payments must be made with personal funds, not business funds or solo 401k funds.
- Since the solo 401k participant is borrowing from the solo 401k plan, at time of loan the loan proceeds must flow to the solo 401k participant’s bank account, not her business. Once the funds are in your personal bank account, you can then disburse them however you wish including placing them in your own business bank account.
- The interest rate for Solo 401k loan is either: A certificate deposit rate plus 2 percent or the prime rate plus 1 percent.
- Solo 401k Loan payments are fixed payments consisting of interest and principal
- Solo 401k loan rules do not allow for Interest only payments or principal payments only.
- Each solo 401k participant can borrow from his or her respective solo 401k balance. For example, if both spouse’s are participating in the solo 401k plan and have account balances, each can borrow up to the statutory limits described below.
- The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.
– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)
– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K
– The minimum Solo 401k loan amount is $1,000.
- The Solo 401k rules require the following proper Solo 401k loan documentation:
– Solo 401k Loan Agreement
– Solo 401k Loan Application
– Solo 401k Loan Payment Amortization Schedule
You can obtain more information regarding borrowing/taking a participant loan from a Solo 401k at: https://www.mysolo401k.net/Solo401kLoan.html
