Solo 401k Loans: How to Borrow from Your Own Retirement
Need cash for your business? Stop begging the bank. If you have a Solo 401k, you are sitting on your own private bank. The Solo 401k Participant Loan allows you to borrow up to $50,000 tax-free and penalty-free. The best part? You don’t pay interest to a stranger. You pay the interest back to yourself. It is one of the few “free lunches” in the tax code, but only if you have the right plan documents. Here is how to execute the “Self-Banking” strategy without triggering an IRS audit.
The ultimate banking hack: Writing a loan check where the interest goes back to you.
1. Why “Paying Yourself” Wins
Compare a bank loan vs. a Solo 401k loan. The difference is who keeps the profit.
*Reality Check: With a Solo 401k loan, the “cost” is opportunity cost (the money isn’t invested in stocks). But the cash flow cost is effectively zero because the interest stays in your pocket.
2. The “50/50” Rule
You cannot drain your entire account. The IRS sets strict caps.
1. $50,000
2. 50% of your vested account balance.
Exception: If your balance is under $20,000, you can borrow up to $10,000 (even if that’s 100%).
| Account Balance | Max Loan Amount | Reason |
|---|---|---|
| $15,000 | $10,000 | Low Balance Exception |
| $60,000 | $30,000 | 50% Rule Applies |
| $200,000 | $50,000 | $50k Hard Cap Applies |
3. What Happens If You Don’t Pay?
This is a loan, not a distribution. If you default, the IRS attacks.
- Repayment Schedule: You must make payments at least quarterly.
- Duration: Max 5 years. (Unless used to buy your primary residence, then up to 15-30 years).
4. Provider Check: Can You Actually Do This?
Not all Solo 401k plans are created equal.
- Standard Plan: Does NOT allow loans.
- Why: To save admin costs.
- Fix: Must restate to a custom plan.
- Standard Plan: Allows loans (E*TRADE).
- Custom Plan: Allows loans (MySolo401k, etc).
- Flexibility: Full “Self-Banking” access.