Starting a business is hard. Finding funding for your new business can be even harder. You might even have retirement funds sitting in old employer 401k plans, IRAs. Those funds are just sitting there. Why not put them to work? With the Solo 401k, you can get startup capital from your retirement account for your business.
“Why fit in when you were born to stand out?” – Dr. Seuss
Startup Funding
Sometimes the most important asset of your business is your assets. But when you’re just starting out, cashflow can be tight. Luckily, the Solo 401k has a feature called the Participant Loan built right in. With a participant loan, you can lend money from your retirement account to yourself. And unlike a distribution from your retirement account, there are no taxes or early withdrawal penalties to pay.
You can take out up to 50% of your total account value, maxing out at $50,000. If your spouse participates in the Solo 401k with you, (s)he can take a participant loan as well of up to $50k or 50% of his/her account value. Let’s take a look at some examples:
Jim rolls in $100k to his Solo 401k plan. Pam rolls in $80k. Jim can take the participant loan of up to $50,000. Pam can take a loan of up to $40,000.
Dwight rolls in $400,000 to his Solo 401k plan. Angela also rolls in $400,000 to her Solo 401k plan. Dwight and Angela can each take the participant loan of the max $50,000. This means they can take out a total of $100,000 from their Solo 401k plan.
How it Works
Taking the participant loan from the Solo 401k is easy. Our document system has all the paperwork you need to legitimatize the loan including: promissory note, amortization schedule and loan repayment schedule.
Simply log into your 401k document center and click on “Loans”. Enter the in the amount of the loan you want to take and hit submit. Our software will take care of the rest. You can download your loan paperwork instantly and write yourself the check immediately.
The Solo 401k participant loan is a loan from the 401k plan to you as the plan participant. Write the check from the Solo 401k trust bank account to yourself personally (not your business). The business doesn’t take the loan directly as that would be a prohibited transaction. Rather, you take the loan personally from your Solo 401k. Once you deposit the check in your personal bank account, you can use those funds for anything you want, including capital for your business.
Pay it Back, Pay it Forward
You have five years to pay the money back to your Solo 401k plan. The loan interest rate is generally set as the prime rate plus 1-2%. To keep costs low, we’ve set the participant loan rate for the Solo 401k at prime + 1%. Any interest earned on the loan goes directly back in to your Solo 401k plan. Many account holders consider it an extra “bump” in savings to the 401k plan.
Payments can be made monthly or as infrequently as quarterly. Make sure you pay the loan back on time and in full. Any outstanding repayment amount or default will be considered a distribution from your 401k plan.
Once your loan is paid back, you can start all over again. Remember your maximum loan amount will always cap out at 50% of your account value, or $50,000 – whichever is less.
Get Started Now
The IRS allows 401k participant loans and outlines further parameters on how to take your loan compliantly here. There is no waiting period once you setup your Solo 401k. You can get startup funding from your retirement plan immediately.
As soon as you setup your plan and rollover funds, you are instantly able to tap into those funds to get startup capital and funding for your business. After all, it’s your money, your business, and your retirement funds. Shouldn’t you get to choose how to spend the money so you, your family, and your business can benefit as much as possible?
