Solo 401k multiple loans
I currently have one outstanding loan from my Solo 401k. I would like to pay it off and take another one (larger in size). Are there any problems with taking multiple loans in a short period of time?
Answer:
Once the 401k loan is paid off, there is a restriction on the amount of the second loan. The amount for the second loan is reduced by the highest balance of the first Solo 401k loan in the previous 12 months.
Below is an excerpt from the IRS website regarding multiple 401k loans:
https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans
Jim, a participant in our retirement plan, has requested a second plan loan. Jim’s vested account balance is $80,000. He borrowed $27,000 eight months ago and still owes $18,000 on that loan. How much can he borrow as a second loan? Would it benefit him to repay the first loan before requesting a second loan?
Jim will only be able to take a second loan if your plan’s terms allow it. You’ll find how to determine the maximum amount Jim may borrow in IRC Section 72(p)(2)(A). The law treats the portion of the loan that exceeds the maximum amount as a distribution. Generally, any previously untaxed amount of the distribution is taxable. We’ll use the facts in your question to calculate Jim’s maximum allowable loan balance.
The new loan plus the outstanding balance of all other loans cannot exceed the lesser of:
- $50,000, reduced by the excess of the highest outstanding balance of all Jim’s loans during the 12-month period ending on the day before the new loan (in this example, $27,000) over the outstanding balance of Jim’s loans from the plan on the date of the new loan (in this example, $18,000), or
- The greater of $10,000 or 1/2 of Jim’s vested account balance.
Maximum second loan if amount still owed on first loan
Jim’s current loan balance is $18,000. This amount plus the new loan cannot exceed the lesser of:
- $50,000 – ($27,000 - $18,000) = $41,000, or
- $80,000 x 1/2 = $40,000
Jim’s total permissible balance is $40,000, of which $18,000 is an existing loan balance. This leaves a new maximum permissible loan amount of $22,000 ($40,000 - $18,000).
Maximum second loan if first loan repaid
Because the law bases Jim’s maximum loan on all of his loans during the 12 months prior to the new loan, there isn’t a significant advantage for Jim to pay off his first loan before requesting a second. If Jim repaid the $18,000 before applying for the second loan, he would be limited to the lesser of:
- $50,000 – ($27,000 – 0) = $23,000, or
- $80,000 x 1/2 = $40,000
In this case, the maximum permissible loan amount would be $23,000.