All you need to know about 401k Loans in 2 minutes(ish)
- You can borrow up to half of your total account value, to a maximum of $50,000.
- The safest, no-documentation-needed, interest rate for a Solo 401k is generally considered 'Prime + 2%'.*
- Maximum loan duration is 60 months; but more like 240 months to help buy your primary residence.
- Payments must be exact. No extra principal (unless you're making a lump-sum payoff).
- Paperwork and payments in order? Then therre’s no tax-bill associated a 401k loan.
- With our plans: Funding is immediate. You simply write a check from the Plan to yourself and keep a copy of the short, reusable, loan document we give you.**
Loan examples to get a picture how this looks start-to-finish
Let’s say you want to pay cash for a rental and need $100,000. Your 401k has $200,000 in it. What can be done? Well, $50,000.
...but wait! You can have up to five loans, right? What if you borrow $50,000, that leaves $150,000 in the account, can’t you just go borrow another $50,000 using a second loan and then have the full $100,000?
The ‘half the balance to a maximum of $50,000’ rule covers the whole account. Hey, just be grateful it’s not an IRA. You can’t borrow from them at all (self directed or otherwise). If you have the ability to borrow from two unrelated 401k plans though, loans and balances from one wouldn't impact the other.
Let's say you have a $180,000 mortgage note and $20,000 cash in your retirement account and you've taken a $12,000 loan a little less than year ago you still owe $10,000 on. What's the maximum you can borrow right now? $38,000. What's the largest check your Plan can give you though? $20,000.
Here's how we got there, and the things to consider:
- $200,000 is the total account value, $100,000 is half of that, but the maximum loan amount is $50,000
- So we take the maximum, $50,000, and subtract the highest amount owed in the last year.
- In this case the loan for $12,000 needs to be subtracted, bringing us to $38,000. This is the amount you could borrow if your Plan has the available cash (or borrows it).
- Though you can borrow $38,000, there's only $20,000 cash in the account, so that's the largest amount really on tap (ignoring account minimums or such you want to allow for).
Using a 401k loan to fund flips, inventory, or other short-turnover activity?
Lots of people want fund a flip's down payment or business needs with a plan loan. But because of 401k loans '12 month highest borrowed balance' rule; if you want to use the cash for a short time, pay it off, and then use it again in a few weeks/months you can’t. …but there's an easy work around.
Don't pay it off.
Access your funds, use them to do what you need, and when you're done just put the money in a savings account ready to use again on the next deal. Just make your loan payments on time and those 401k loan funds stay ready to go at a moments notice, no paperwork or year look back.
This gives you the most liquidity possible. It’s a lot like a line-of-credit (accept you’re paying yourself the interest and your credit score doesn’t matter). Using your 401k this way can allow your time and talents the capital you need to grow your current income; and that's a good thing for your future savings.
…good work. You're now miles ahead of most in knowing what 401k loans can (and can't) do to help your ( current and future) finances. You can use them not just in a cash crunch; but to strategically improve your future.
As to what can be done inside our Solo 401k plans?
Excellent loan provisions don't even scratch the surface. You can do whole deals tax-free-forever, combine investment capital, directly hold precious metals, cryptocurrency, use outside financing on a host of different assets, and more.
Hit the chat box or call and talk to us about what you'd like to invest in.
More details and when the maximum isn't really the maximum
- If you're buying a primary residence and all the funds will be toward the purchase price, down payment, or closing costs, the loan can be for a 'typical' mortgage length. We'd suggest 20 years or less to be safe.
- The 'maximum' available to borrow is lowered by whatever the highest amount owed was in the past year (this doesn't have to be a problem at all even for flippers... see our examples below).
- Plan loans are per participant, so other participants (business partners, employees) don't impact your borrowing limits.
- You can borrow up to $10,000 from your retirement account, even if that was 100% of your account's value, if you provide collateral for the funds.
- You can have up to five loans out at a time per Plan.***
- If you can’t make your 401k loan payments, only the amount not paid back at the time of default is what you’ll owe taxes on (and the 10% penalty if you’re less than 59.5yrs).
- * You can find the Prime Rate by Googling 'WSJ Prime Rate'. Other rates must be supported by you qualifying for a similar loan by a bank. That's more work than most borrowers want, but as long as you keep the documentation it's allowed. A group 401k may have a different rate.
- ** Spousal consent is required for a 401k loan if you're married.
- *** Yes, if you have a regular job and a side-gig you could be in two different 401k plans (or three, or four…) and that means you could have more loans and up to 100k borrowed (or 150k, or 200k…). Different Plans also may have a different amount of loans allowed outstanding but not a higher overall balance outstanding.