Home  |  About  |  Contact  |  Login  |  Open an Account

Individual 401k Loan

What are the advantages of the Individual 401k versus other small business retirement plans?

One benefit of the Individual 401k is a 401k loan. The SEP IRA, Simple IRA and Keogh plans do not permit loans.

IRS rules permit 401k loans, however not all Individual 401k providers allow loans. Provided there is a loan provision, then a 401k loan is permitted using the accumulated balance of the 401k for the loan. 401k loans are permitted up to 50% of the total balance of the 401k up to a maximum of $50,000. A loan from the Individual 401k is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.

Individual 401k loans are repaid either monthly or quarterly and typically a 401k loan has a 5 year term. An Individual 401k loan used for the purchase of a primary residence may have a 15 year term (the maximum loan term for a residence will vary depending on the provider). 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.

Note: An Individual 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). The interest rate for the 401k loan can be as low as the Prime Rate (3.25%).

Example: A small business owner sets up an Individual 401k and transfers $50,000 from a 401k plan from an ex-employer, $25,000 from a SEP IRA and $25,000 from a Rollover IRA.

After the $100,000 from the 3 retirement accounts has been transferred to the Individual 401k the small business owner could get a 401k loan up to $50,000. A loan up to 50% the value of the 401k is permitted up to a $50,000 maximum. In this example, the business owner would have a $50,000 balance remaining in their Individual 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 an Individual 401k loan as a small business loan?

Small business loans are often needed by small business owners, entrepreneurs and self employed individuals. Getting a small business 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 Individual 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 an Individual 401k loan as a small business loan?

  1. The loan can be used for any purpose.
  2. There are no income or credit qualifications. As a result, bad credit won't prevent you from getting a small business loan.
  3. The monthly loan payments of principal and interest are repaid back into your own Individual 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 an Individual 401k and you have existing retirement accounts, then there is a simple solution to getting a loan. You can setup your own Individual 401k, can transfer your retirement accounts into the Individual 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 Individual 401k up to a maximum of $50,000.

Since you are using your Individual 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. Loan interest rates can be as low as the Prime rate (3.25%) and because you are borrowing your money, the interest and principal is repaid back to yourself. Monthly loan payments are made into your Individual 401k (not to a bank) over 5 years.

Securing an Individual 401k loan is a simple 3 step process

  1. Setup an Individual 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.
  2. Rollovers and Transfers - You can rollover your 401k, 403b, 457 retirement plan from a previous employer. You can transfer a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA and Keogh plan.
  3. 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.

Learn more about the benefits of the Individual 401k.


How Can BCM Help You?

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.

Email Address
How can BCM help you?
*Safety and confidentiality are very important to us. Read our privacy policy.



*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.