Comments on: How to borrow money from your Solo 401(k) http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/ The Ultra-Powerful Investment & Retirement Plan for the Self-Employed Tue, 30 Mar 2010 23:41:42 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Jeff Nabers http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-82 Jeff Nabers Wed, 11 Mar 2009 17:39:29 +0000 http://solo401k.com/?p=132#comment-82 BJ, The situation described, although indirect, would be a prohibited transaction. Read more here: http://jeffnabers.com/2008/04/24/prohibited-transaction-basics/ Even if there were other investors who fractionally bought your trust deed, it would likely be a PT. You simply can't direct your IRA/401k to invest in something with the knowledge or expectation that it will become part of a chain of events to involve or benefit you soon thereafter. With a world of tremendous investment opportunities out there, it just doesn't make sense to risk the 115%+ taxation that is applied to prohibited transactions. Call my office to find out more about the compliant and profitable things your Solo 401k can do. 877-SOLO-401K Jeff BJ,

The situation described, although indirect, would be a prohibited transaction. Read more here:

http://jeffnabers.com/2008/04/24/prohibited-transaction-basics/

Even if there were other investors who fractionally bought your trust deed, it would likely be a PT. You simply can’t direct your IRA/401k to invest in something with the knowledge or expectation that it will become part of a chain of events to involve or benefit you soon thereafter.

With a world of tremendous investment opportunities out there, it just doesn’t make sense to risk the 115%+ taxation that is applied to prohibited transactions.

Call my office to find out more about the compliant and profitable things your Solo 401k can do. 877-SOLO-401K

Jeff

]]> By: BJ Kool http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-81 BJ Kool Wed, 11 Mar 2009 17:14:55 +0000 http://solo401k.com/?p=132#comment-81 Also, I am 58 1/3 so I want to defer payments on the mortgage as long as I possibly can since I will be unemployed and starting a new business. Cash will be tight, so perhaps the purchased trust deed and loan can be rewritten for interest only payments, or interest accrual to be paid in 2 years, or something like that Also, I am 58 1/3 so I want to defer payments on the mortgage as long as I possibly can since I will be unemployed and starting a new business. Cash will be tight, so perhaps the purchased trust deed and loan can be rewritten for interest only payments, or interest accrual to be paid in 2 years, or something like that

]]> By: BJ Kool http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-80 BJ Kool Wed, 11 Mar 2009 17:12:23 +0000 http://solo401k.com/?p=132#comment-80 I am struggling with a matter. I expect to be laid off here soon. I have $100K in my 401K which I will have rolled over into a either a self directed IRA, (or perhaps this Solo 401K since I will be starting a new business) I have a mortgage of $90K. I was thinking of investing my self directed IRA with a real estate broker who buys trust deeds - if he uses my investment to buy the trust deed for my house from the lender, does that create a conflict. If he uses money from more than one investor, including my IRA, to buy my trust deed, does that create a conflict? I am struggling with a matter. I expect to be laid off here soon. I have $100K in my 401K which I will have rolled over into a either a self directed IRA, (or perhaps this Solo 401K since I will be starting a new business) I have a mortgage of $90K. I was thinking of investing my self directed IRA with a real estate broker who buys trust deeds – if he uses my investment to buy the trust deed for my house from the lender, does that create a conflict. If he uses money from more than one investor, including my IRA, to buy my trust deed, does that create a conflict?

]]> By: Jeff Nabers http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-79 Jeff Nabers Thu, 05 Mar 2009 04:42:15 +0000 http://solo401k.com/?p=132#comment-79 Jed, I hadn't run across that information before. I certainly don't know everything about retirement plans. I tend to focus on investment matters, and buying a primary residence isn't an investment in my opinion. I learn something new every day. Thanks :-) Jeff Jed,

I hadn’t run across that information before. I certainly don’t know everything about retirement plans. I tend to focus on investment matters, and buying a primary residence isn’t an investment in my opinion.

I learn something new every day. Thanks :-)

Jeff

]]> By: Jed Wood http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-76 Jed Wood Thu, 05 Mar 2009 04:29:57 +0000 http://solo401k.com/?p=132#comment-76 Well I was still referring to a loan rather than a distribution, but I'm an admitted n00b here. Guess I shouldn't believe everything I read on the internet. :) Is there perhaps a different set of guidelines for borrowing from a Solo 401k than from a "regular" 401k? Or are these folks all just wrong? <blockquote>If I want to borrow for a down payment on the purchase of my primary residence, do I have to pay the loan back in five years like a normal 401k loan? No, most plans allow longer pay back terms when the loan is going to be used to purchase a primary residence. Ten to fifteen years is common.</blockquote> Source: http://www.401khelpcenter.com/loans.html <blockquote>Length of Loan - typically the loan term would be five years (60 months) or less. In the case of a home loan, terms could be as long as 15 years.</blockquote> Source: http://www.money-zine.com/Financial-Planning/Retirement/401k-Loans/ <blockquote>You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.</blockquote> Source: http://moneycentral.msn.com/articles/retire/basics/4714.asp Well I was still referring to a loan rather than a distribution, but I’m an admitted n00b here. Guess I shouldn’t believe everything I read on the internet. :) Is there perhaps a different set of guidelines for borrowing from a Solo 401k than from a “regular” 401k? Or are these folks all just wrong?

If I want to borrow for a down payment on the purchase of my primary residence, do I have to pay the loan back in five years like a normal 401k loan?

No, most plans allow longer pay back terms when the loan is going to be used to purchase a primary residence. Ten to fifteen years is common.

Source: http://www.401khelpcenter.com/loans.html

Length of Loan – typically the loan term would be five years (60 months) or less. In the case of a home loan, terms could be as long as 15 years.

Source:
http://www.money-zine.com/Financial-Planning/Retirement/401k-Loans/

You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.

Source:
http://moneycentral.msn.com/articles/retire/basics/4714.asp

]]> By: Jeff Nabers http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-78 Jeff Nabers Tue, 03 Mar 2009 20:35:46 +0000 http://solo401k.com/?p=132#comment-78 The "pull it out for the purchase of a primary residence" method is just an exclusion to the 10% early distribution penalty. So when you use that, you are distributing money from your plan to yourself that cannot be paid back into the plan. So that creates a taxable event (although avoids the extra 10% tax) whereas a Solo 401(k) participant loan is not a taxable event because there is no distribution. Loan... - Not taxable - To be repaid - Money ends up back in the plan where it can invest again in the future with tax-favored treatment Distribution... - Taxable - Not to be repaid - Money permanently exits the plan and will not receive tax-favored treatment if used for investment purposes in the future Apples and oranges. Jeff The “pull it out for the purchase of a primary residence” method is just an exclusion to the 10% early distribution penalty. So when you use that, you are distributing money from your plan to yourself that cannot be paid back into the plan. So that creates a taxable event (although avoids the extra 10% tax) whereas a Solo 401(k) participant loan is not a taxable event because there is no distribution.

Loan…
- Not taxable
- To be repaid
- Money ends up back in the plan where it can invest again in the future with tax-favored treatment

Distribution…
- Taxable
- Not to be repaid
- Money permanently exits the plan and will not receive tax-favored treatment if used for investment purposes in the future

Apples and oranges.

Jeff

]]> By: Jed Wood http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/comment-page-1/#comment-77 Jed Wood Tue, 03 Mar 2009 20:19:36 +0000 http://solo401k.com/?p=132#comment-77 You could always pull it out for the purchase of a primary residence and get a longer term. There are plenty of <a href="http://www.mymoneyblog.com/archives/2008/07/better-example-against-double-taxation-of-401k-loans.html" rel="nofollow">debates</a> on the topic, but one of the oft-cited disadvantages is "if you get fired or lose your job, you have to pay back the loan immediately." That disadvantage isn't really there for a self-employed individual with a Solo 401k. As always, it depends on the specific numbers for interest rates, but it's nice to know it's there as an option. I honestly have no idea when I'll buy a home, nor how much it will cost. Rather than pitching cash into a "home" fund that's just a standard taxable savings account, I'd prefer to put it in the 401k. If don't end up needing it-- great! You could always pull it out for the purchase of a primary residence and get a longer term. There are plenty of debates on the topic, but one of the oft-cited disadvantages is “if you get fired or lose your job, you have to pay back the loan immediately.” That disadvantage isn’t really there for a self-employed individual with a Solo 401k.

As always, it depends on the specific numbers for interest rates, but it’s nice to know it’s there as an option. I honestly have no idea when I’ll buy a home, nor how much it will cost. Rather than pitching cash into a “home” fund that’s just a standard taxable savings account, I’d prefer to put it in the 401k. If don’t end up needing it– great!

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