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Individual 401k Loans

Small business loans and self employed loans using the 401k

The simplicity, speed and favorable repayment terms make Individual 401k loans an attractive alternative to self employed loans and small business start up loans.

An Individual 401k loan is permitted using the accumulated balance of the Individual 401k as collateral for the loan. Individual 401k loans are permitted up to 50% of the total balance of the 401k up to a maximum of $50,000. A loan from an Individual 401k is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.

Advantages of an Individual 401k loan compared to a self employed loan or small business loan

  1. The loan can be used for any purpose.
  2. There are no income or credit qualifications to receive the loan.  
  3. The monthly loan payments of principal and interest are repaid back into your own Individual 401k

Small business owners and self employed individuals can establish an Individual 401k and can rollover previous employer's retirement plans and can transfer existing retirement accounts into their own Individual 401k. The Individual 401k balance is available to be used as a tax free loan.

The Individual 401k is eligible to self employed individuals and small business owners with no full time employees other than a spouse. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.

Rollovers and Transfers

Rollovers and transfers of existing retirement accounts into the Individual 401k are permitted. You can rollover 401k, 403b, 457 and other previous employer's retirement plans as well as transfer Keogh, SEP IRA, Traditional IRA and IRA rollover accounts. After the retirement assets have been transfered into an Individual 401k for 10 business days, the assets are immediately eligible to be used as collateral for an Individual 401k loan.

Consolidating retirement accounts into your Individual 401k is ideal if you would like to take advantage of the loan provision. By rolling over your previous retirement plans you build the 401k balance quickly and then can use its value to receive a larger Individual 401k loan.

Loan Repayment Terms

Generally, Individual 401k loans have a 5 year maximum repayment term. Individual 401k loans used for the purchase of a primary residence may extend the loan repayment term up to 10-15 years. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated.

Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties. Loans are not permitted with other self employed retirement plans such as a SEP IRA, SIMPLE IRA, or Keogh (Money Purchase/Profit Sharing plans).

Loan payments are made monthly or quarterly. The interest rate charged on the loan is very favorable. Generally, the loan interest rate charged is the Prime Rate or Prime plus 1% or 2%. The interest rate depends on the Individual 401k provider. It is important to note loan payments of principal and interest are repaid back into your own Individual 401k. Because of this unique loan feature an Individual 401k loan may be a favorable option compared to other loans in which interest is paid to a bank or lending institution.

Summary

The proceeds from an Individual 401k loan can be used for any purpose, there are no income or credit qualifications to receive the loan and interest and principal is repaid to yourself. Start up businesses and self employed business owners often receive high interest rate loans and experience difficulties when trying to qualify for small business loans through banks and lending institutions. The simplicity, speed and favorable repayment terms make the Individual 401k loan an attractive alternative as a small business loan.

 

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Beacon Capital Management Advisors (BCM) is experienced in setting up retirement plans for our clients. BCM provides retirement plans to the self employed, freelancers, entrepreneurs, independent contractors and small business owners and is registered in 50 States. Complete the form below and a BCM Advisor will promptly respond to your inquiry.

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.