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SMALL BUSINESS
JULY 1, 2019

Can I borrow from my Solo 401(k) account?

Answered by
Judith Anderson
Senior Vice President, Retirement & Personal Wealth Solutions, Bank of America
You can borrow money from your account in your Individual 401(k) plan, also known as a Solo 401(k) plan, but there are some financial implications to consider. In the event of a financial hardship or emergency, taking out a 401(k) loan may be worth exploring. But before you tap into these funds, you should carefully consider several important factors:
  • Loans are limited to 50% of your vested account balance or $50,000, whichever is less.
  • You may be able to take out multiple loans at a time, but your total outstanding loan balance may not exceed $50,000 (or 50% of your vested balance) in a 12-month period.
  • Interest on the loan is not tax-deductible.
  • The funds you borrow are no longer invested, which may limit your opportunity for potential investment earnings.
"Be careful not to lose sight of your long-term goals for retirement in order to meet a short-term need."
— Judith Anderson, Senior Vice President, Retirement & Personal Wealth Solutions at Bank of America
The loan must be repaid within five years of the date you receive the loan proceeds, unless it was used in the purchase of a primary residence. If you don't repay the loan in that time, the tax laws consider the outstanding balance a distribution — which means the loan balance is subject to federal income taxes and may be subject to an additional 10% early withdrawal tax, unless an exception applies.
And one more thing: Since the interest on a 401(k) loan is not tax-deductible, the actual cost to you may be higher — even if the interest rate might seem lower than that of a bank or credit union. While traditional 401(k) contributions are made with pretax dollars, loan payments are made with after-tax dollars.
Finally, beyond all the rules for withdrawing from your retirement account in the Individual 401(k) plan, there's an additional reason for exercising caution. Borrowing from yourself through your account in the Individual 401(k) plan could have a significant impact on your future account balance and overall retirement savings strategy. You need to be careful not to lose sight of your long-term goals for retirement in order to meet a short-term need.
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