One advantage of a Self Employed 401k versus other self employed retirement plans such as a SEP IRA, Simple IRA or Keogh retirement plan is the ability to receive a loan using the accumulated balance of the Self Employed 401k as collateral. Provided a Self Employed 401k has a loan provision, Self Employed 401k loans are permitted up to 50% of the total value of the Self Employed 401k up to a maximum of $50,000.
In general, Self Employed 401k loans are repaid monthly over a 5 year term. A Self Employed 401k loan used for the purchase of a primary residence may have a 15 year term. 401k 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 will result in a loan default causing taxes as well as IRS penalties.
The simplicity and ease of a Self Employed 401k loan is a key benefit and may be considered a valuable feature for many self employed business owners.
Note: A Self Employed 401k loan is not a debt instrument. The loan is not made by a bank or lending institution. With a 401k loan you are simply borrowing your own money from your 401k. Since you are borrowing your own money, principal and interest payments are paid back into your own 401k (not to a bank). Generally, the loan interest rate charged is the Prime Rate plus 1% or 2%. The interest rate depends on the 401k provider’s plan document.
Example: A small business owner sets up a Self Employed 401k and transfers $100,000 from an IRA (or a previous employer's 401k).
The client could get a 401k loan up to $50,000. A loan up to 50% of the value of the 401k is permitted up to a $50,000 maximum. In this example, a client would have a $50,000 balance remaining in their Self Employed 401k and would receive a check for $50,000 for the loan. The $50,000 loan is received tax free and provided loan payments are repaid on time, then there are no taxes due.
Why consider a Self Employed 401k loan as a self employed loan?
Self employed loans are often needed by small business owners, entrepreneurs and self employed individuals. Getting a self employed loan through banks and lending institutions can be difficult. Potentially there is a simple solution. Many small business owners are getting loans up to $50,000 using an Self Employed 401k loan as a small business loan because 401k loans are fast, easy to obtain and have favorable interest rates.
What are the advantages of using a Self Employed 401k loan as a self employed loan?
- The loan can be used for any purpose.
- There are no income or credit qualifications. As a result, bad credit won't prevent you from getting a small business loan.
- The monthly loan payments of principal and interest are repaid back into your own Self Employed 401k.
Do you have assets in a 401k, 403b or 457 plan with an ex-employer, or do you have a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA or Keogh Plan?
If you are eligible for a Self Employed 401k and you have existing retirement accounts, then there is a simple solution to getting a loan. You can setup your own Self Employed 401k, can transfer your retirement accounts into the Self Employed 401k and then you use your 401k money as collateral to get a loan. You can get a loan up to 50% of the value of the Self Employed 401k up to a maximum of $50,000.
Since you are using your Self Employed 401k balance as collateral, you are automatically approved for the loan. There are no credit checks so the loan is particularly appealing for those with bad credit. The 401k loan interest rate is the Prime Rate plus 1% or 2% and because you are borrowing your money, the interest and principal is repaid back to yourself. Monthly loan payments are made into your Self Employed 401k (not to a bank) over 5 years.
Securing a Self Employed 401k loan is a simple 3 step process
- Setup a Self Employed 401k - You are permitted to setup a 401k provided you are self employed and provided you have no W-2 employees (other than a spouse) who work more than 1,000 hours per year. You are eligible to establish a 401k for a side business even if you participate in a 401k, 403b or 457 plan through your primary employer. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.
- Rollovers and Transfers - You can rollover your 401k, 403b, 457 and Thrift Savings Plan from a previous employer. You can transfer a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA and Keogh plan.
- Submit 401k Loan Request Form - After the rollover check is deposited into your 401k for 5 business days, you are eligible for a 401k loan. You are permitted to receive a loan up to 50% of the total 401k value up to a maximum of $50,000.
Self Employed 401k Advantages
There are two primary advantages of a Self Employed 401k. The option of a 401k loan and high contribution limits. In 2020 contributions of up to a maximum of $57,000 or up to $63,500 if age 50+ can be made into a Self Employed 401k. Also, due to the way the calculation works a self employed business owner can potentially make greater retirement contributions at the same income level when compared to a SEP IRA or Keogh plan, therefore maximizing retirement contributions and valuable tax deductions.
Learn more about Self Employed 401k contribution limits.