A Solo 401(k) participant loan lets you borrow from your own retirement plan without triggering a taxable distribution, as long as the loan is properly documented and repaid on schedule. The Self-Directed Plans Solo 401(k) includes the loan feature as a standard part of the plan.
The maximum loan amount is the lesser of $50,000 or 50% of your vested account balance. If your account holds $60,000, your limit is $30,000. If it holds $200,000, your limit is $50,000.
You may have multiple loans outstanding at the same time, as long as the combined balance does not exceed your limit. Loans are participant-specific. If your spouse also participates in the plan, each of you may borrow up to your respective individual limit.
The maximum term is five years. An exception applies if the loan is used for the purchase of a primary residence, in which case a longer term is permitted. The tax code does not specify a maximum extended term, but ten years or less is standard practice.
You may use the borrowed funds for any purpose. Once the funds leave the plan, they are yours to use as you see fit. Common uses include business startup or expansion costs, paying down higher-rate debt, real estate investment outside the plan, and down payment funds for a primary residence.
The loan carries a fixed interest rate set at the time of origination. A common and acceptable practice is to use the U.S. Prime Rate plus one percent. Payments must be made on a straight-line amortized basis at least quarterly. There is no penalty for paying the loan off early.
Payments are made from your personal account back to the plan trust account and must be deposited to the same participant sub-account from which the funds were borrowed.
As both trustee and administrator of your Solo 401(k), you manage the loan process yourself. No third-party approval is required, and no additional fees apply. Your plan documents include the loan forms and promissory note needed to create the proper paper trail.
Failure to make at least quarterly payments triggers a default. The outstanding loan balance is treated as a taxable distribution. If you are under age 59½, the 10% early withdrawal penalty applies as well. That topic is covered in full in What happens if I default on a participant loan?
This information is provided for educational purposes only and should not be interpreted as tax, legal, or investment advice. Readers are encouraged to consult a qualified professional who can offer guidance based on their personal situation.