Answer:

A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value (whichever is less) with the following terms:

• To be repaid over an amortization schedule of 5 years or less
• Regular payments no less frequently than quarterly, i.e. monthly or quarterly
• At a reasonable rate of interest, generally interpreted as prime rate + 1%

Under what conditions is this allowed?

Any. As long as the plan documents allow for it and the proper loan documents are prepared and executed, a participant loan can be made for any reason.

How can I obtain the loan documents?

We provide the Solo 401(k) loan documentation on our client portal. Our loan agreement is in compliance with the DOL and IRS requirements that state that the loan must be confirmed by a legally enforceable agreement (Treas. Reg. 1.72(p)-1, Q&A 3(b). According to regulations, the loan agreement must clearly identify an amount borrowed, a loan term, and a repayment schedule.

Loan documents include a completed loan agreement and a printed loan amortization schedule.  These must be completed before taking the loan.

When is a participant loan useful?

A Solo 401(k) participant loan can be useful when someone is thinking about distributing money out of their retirement account for some reason. I recently spoke with someone who wanted to distribute $20,000 of of her IRA in order to pay off $10,000 of a high interest credit card debt she accumulated because of a medical emergency.  She had to take out $20,000 because it would have cost her almost $10,000 in taxes in penalties to have additional $20,000 in taxable income.

After we spoke, her strategy was amended to the following:

• Setup a Solo 401k plan (adopted by her business) and transfer IRA funds into it
• Take a participant loan of $10k
• Pay off $10,000 in credit card debt

The result of the new strategy:

• Avoided IRA distribution
• Avoided $10,000 in early distribution taxes and penalties
• Paid participant loan back within couple years

There are many other common uses for a Solo 401(k) participant loan. If a person wants to make a <$50k investment that would otherwise be a prohibited transaction, they can take a participant loan to borrow the money and do the investment as an individual.

The standard limit for a participant loan repayment period is five years or 60 months.

The only exception is for using the loan to purchase a primary residence (real estate).  If the participant loan will be used for the purchase of a primary resident, the loan repayment period can be extended up to 15 years.  In order to qualify for the extended repayment period, the loan must be designated as going towards the purchase of a primary residence property.

Please note that the extended repayment period is not applicable for refinancing and can only be used toward new purchases only.