For those who want to save for retirement, a 401(k) account can help. If you are self-employed and do not have employees, you have the option of opening a self-directed 401(k) account. Unlike most company-sponsored accounts, a self-directed 401(k) offers you investment options that go well beyond mutual funds, stocks and bonds. In fact your self-directed 401(k) allows you to invest in real estate, precious metals, renewable energy sources, private placements and much more. This means your portfolio can be more diverse, allowing you to take bigger risks but reap much larger rewards. You can save much more at a faster rate for your future. However, what happens if you run into a financial hardship and need money now?
The Internal Revenue Service (IRS) establishes regulations that govern all kinds of financial realities. The IRS strictly forbids certain types of transaction when it comes to your retirement account. Referred to as prohibited transactions, these include very specific types of trades and actions the IRS considers “self-dealing.” Because your 401(k) is intended for future use, if you are under 59 ½, taking money from your account is considered an early distribution. This will subject you to regular income tax rates as well as a 10% penalty fee. However, unbeknownst to many account owners, the IRS does allow you to take a loan from your 401(k).
Self-Directed 401(k) Loans
A loan from your 401(k) can help you take part in a transaction that the IRS would prohibit. This may sound sneaky, but there are certainly times when such a transaction may be necessary. Regardless of the reason for the loan, however, you should understand how to take one.
- The first thing you should do is find out if your plan permits personal loans. Not all financial institutions will allow this. (If you have a self-directed 401(k) with Royal Legal Solutions, you are in luck! We recognize that your account is built from your money and investment choices and respect that. If you need access to a personal loan, we can help.)
- If your plan allows for a personal loan, you will then need to apply for one. As the participant, you must apply for the loan; the Trustee will then approve it. (With a self-directed 401(k), you are both the participant and Trustee, so this part is easy.)
- You should know that your loan is limited. You can request $50,000 or 50% of your entire account balance. (The IRS dictates that you can take the lower of those two, which means you will not be eligible for a $50,000 loan if your account balance is not $100,000 or more.)
- You dictate your repayment plan. With an amortized loan, your repayment schedule must be five years or less. Your repayments must be made regularly. This includes weekly, bi-weekly, monthly or quarterly payments. (You cannot make a single lump sum repayment or semi-annual payments.) Your loan’s interest rate must be consistent with interest rates being applied to other loans.
Invest with Royal Legal Solutions
At Royal Legal Solutions, our experts take pleasure in seeing your retirement account excel. Speak with one of our knowledgeable experts today to find out more about how Royal Legal Solutions can help you make the most of your 401(k) contributions and loans.