Pros and Cons of Borrowing From Your Self-Directed 401K
You may have used up your other borrowing avenues such as a home equity line of credit or personal line of credit, but you have a self-directed 401k (aka solo 401k) sponsored by your self-employed business that allows for 401k participant loans. The advantage of a self-directed 401k over other 401k plans such as a traditional 401k is that you can serve as the trustee of the plan and can thus elect for the 401k plan to allow for participant loans, an option not always available with full-time employer 401k plans. Following are items to consider before borrowing from your self-directed 401k plan.
No Credit Check: Borrowing from your self-directed 401k does not result in a credit score checkup.
Competitive Loan Interest Rate: The participant loan interest rate is based on the current prime rate plus one point, not on your personal credit history.
Loan Amount: You can borrow 50% of the self-directed 401k value, up to $50,000.
Paying Your Own 401k Back: The participant loan payments including the interest flow back to your own 401k, so not to the bank.
Delay Paying Taxes: Since the participant loan payments flow back to your self-directed 401k, you don’t pay taxes on the interest payments until distributions commence at retirement age.
Less Money to Invest: Borrowing from your self-directed 401k plan results in having less funds to put to work by investing on a tax deferred basis.
Loan Default: If you miss a payment and the payment is not made up by the grace period deadline, you run the risk of the loan going into default, resulting in the payment of taxes and possibly distribution penalties.
No Longer Self-Employed: If you stop being self-employed, the outstanding self-directed 401k loan will need to be paid back in full or treated as a distribution.
Comments ( 4 )
@Mark Great post! I know that the ability to access funds quickly via a Solo 401k loan is one of the top reasons that clients set up accounts with us (we also prepare the required Solo 401k loan documents within 1 business day for no additional charge).
My Roth solo 401k funds have been sitting at Titan bank for over 2 months. Neither Gemini or Coinbase have approved my Trust account in 2 months and will not let me buy Bitcoin with my personal account. I am missing out on gains. Is there a temporary Bitcoin account I can buy while awaiting approval? I want to hold my keys but will let institution hold if I can get back quickly when trust approved.
Dr David Grimes
The crypto account has to be funded with solo 401k funds directly not mixed with personal funds.
Might this be a viable way to invest in I-Bonds in order to preserve the i-bonds inherent State and Local tax free status?