Loans From Your Solo 401(k): A How-To Guide

It can be frustrating to see your retirement account grow while you struggle with personal debt. With an individual retirement account (IRA) or self-directed IRA (SDIRA) that is all you can do. However, with a self-directed 401(k), being able to take a personal loan is one of the many benefits you can enjoy. This many sound too good to be true, but a self-directed 401(k), also referred to as a solo 401(k), makes it easier than you may realize.

Benefits of a Solo 401(k) Loan

Loans from your solo 401(k) are actually very easy and extremely flexible. Unlike most other loans, the solo 401(k) loan request itself typically takes only minutes to process. Much of this is because there is not approval process, which saves you valuable time. In fact, you can be instantly approved for a $50,000 loan or up to 50% of the account’s value, whichever is less. Not only is it fast, but you set the interest rate for your loan as well. You can pay your loan back immediately or take up to five years. Your payments can automatically be deducted from each of your paychecks or even quarterly. Additionally, and perhaps most importantly, you can use your solo 401(k) loan on absolutely anything you want.

How Does a Solo 401(k) Loan Work?

Taking a loan from your solo 401(k) account really is easy. However, there are a few steps you will need to take in order to receive your loan.

Step 1. Make sure your particular account permits personal loans.

When you open a solo 401(k) account with a financial institution or firm, your loan is subject to their rules and regulations. (Do not worry – Royal Legal Solutions allows you to use your account how you want, including taking a personal loan all at no additional cost. After all, your solo 401(k) is built entirely of your money and investment returns.) For the most part, solo 401(k) accounts opened through large financial institutions do not permit you to take personal loans from those funds.

Step 2. Process and Complete Your Loan Agreement.

If you use a company like IRA Business Trust that does permit personal loans from your solo 401(k) account, you are ready to process the request. This typically involves simply contacting the company through which you have your account and requesting the loan. The company will advise you on what paperwork is required. In its simplest form, this paperwork will include the amount requested, the loan term, and the agreed upon repayment schedule.

Step 3. Determine and Set Your Interest Rate.

The Internal Revenue Service (IRS) does require that you set a reasonable interest rate for your solo 401(k) loan. However, aside from that, the rate is one you set yourself. For most loans, the IRS considers “reasonable” to be parallel to the same rate charged by commercial lenders on similar loans. As a rule of thumb, expect to set your loan interest rate as the same as a prime rate plus 1 percent. Also, it is important to note that each loan you take from your solo 401(k) will need its own interest rate.

Step 4. Spend Your Money.

Once you have requested your loan, completed the paperwork, and set your interest rate, the funds can be transferred into your personal account.

Avoid Paying Taxes Easily

There is no denying it – if the IRS can tax it, it will. However, there are certain guidelines that make your solo 401(k) loan un-taxable. As long as you abide by these very clear and easily understood guidelines, you can expect to receive your loan tax-free.

  • Make sure your loan abides by IRS regulations regarding the amount and has a proper and legally enforceable loan agreement.
  • Make sure you make regular, balanced payments that go towards both the loan principal and interest rate. (For example, do not make a large, lump sum payment at the end of your agreed repayment period. Also, do not make payments that mostly only repay the loan principal and not the interest.)
  • For most loans, you may repay the loan over a period of five years. The only exception to this rule is if the loan was used in the purchase of your principal residence. In this case, you have fifteen years to repay the loan.

Enjoying Your Solo 401(k) Loan

You have heard us mention that you can use your solo 401(k) loan for virtually anything. This may sound too good to be true, but we assure you, it is not. If you take a loan from your solo 401(k) account, rest assured that the IRS does not provide guidance on how you use it. In other words, as long as you abide by the guidelines listed above, the money you borrow from your solo 401(k) account, you can use it however you wish. This includes covering expenses associated with personal or business ventures, paying off your mortgage or credit card debt, and even taking your family on a vacation.


Last Updated: 
April 24, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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