The Self-Directed Solo 401(k) allows for loans while the Self-Directed IRA or SEP IRA does not.
The Self-Directed Solo 401(k) allows for loans. The loan option allows you to borrow from your own retirement funds, up to 50% of the plan value or $50,000, whichever is less. Solo 401(k) holders may use loans to pay off personal debt, fund a business, or use as the holder sees fit. If you’d like to take a loan from your 401(k), simply fill out the loan application we provide you on your Dashboard.
LOAN PROVISIONS HAVE BEEN UPDATED DUE TO THE CARES ACT of Congress for the year 2020, allowing loans up to $100,000. Read more here.
Loans come out as cash, not retirement dollars, and are do not have any ties to prohibited transactions. So loans can be used for your personal finances and personal business. However, make sure to not MIX personal and retirement dollars. The loan must be repaid back into the Solo 401(k) account before you can use it for a Solo 401(k) investment, which would then be connected to prohibited transaction rules.
In order to make sure the loan is compliant, and will not be hit with taxes,
- The loan must be paid in full within five years unless the loan is used to acquire a principal residence of the participant. See [I.R.C. 72(p) (2) (B)] Rate guidance is set currently available commercial rates.
- The loan must require a substantially level amortization of principal and interest, with payments required at least quarterly.
- The loan is evidenced by an agreement (provided by Rocket Dollar for paying customers)
The Self-Directed IRA does not allow you to take out a loan. There are some exceptions to take out money from an IRA for a first-time home-buyer or hardship withdrawals, but these are not considered loans. It is removing money from your traditional IRA and paying normal tax rates INSTEAD of normal tax rates plus a 10% early withdrawal penalty.