One of wonderful benefits of your Solo-K plan is that your plan will have the ability to exercise a participant loan taken by the participant from their 401(k) funds. Of course, this post is not intended to advise you whether you should ever take a loan….there are pro’s and con’s of doing so….but, rather, you have the legal right to take a loan provided you adhere with all IRS regulations governing such loans.
Here are a few things to keep in mind:
- How much can the loan be — You are able to borrow up to 50% of the account balance or $50,000, whichever is less.
- Loan Duration — Unless used for a primary residence, the loan duration shall be 5 years.
- Spouse/Spouse Loan Amounts — IF both spouses are legitimate participants in the plan and have account balances, each spouse, if they chose, could take a loan from the plan. The maximum amount of the loan is based on each individual’s plan balance. For example, if one spouse had $150,000 and other had $50,000, they would not both be able to take a loan of $50,000 (50% of the combined account balances for the spouses). The spouse with the $150,000 balance could take the maximum loan amount possible, $50,000. The spouse with the $50,000 account balance would be capped at $25,000.
- Repayment Schedule of the Loan — The loan must be repaid in no less frequency than on a quarterly basis. Since there are no prepayment penalties, the loan could be paid on more frequently than a quarterly basis; however, the loan payments cannot be anything less frequent than on a quarterly basis (e.g., no semi-annual, annual or final balloon payment on the loan).
- Loan Repayments, Part 2 — Loan repayments must be made by the participant who took the loan (e.g,. no loan repayment from a third party).
- Loan Repayments, Part 3 — For most of you taking the loan in a traditional manner, your loan repayment will be based on the current Prime interest rate, plus 1%.
- Loan Repayments, Part 4 — This should go without saying, but contributions to your Solo 401k do not satisfy the loan repayment schedule.