The Solo 401k can be a valuable and flexible tool in your retirement tool belt. Partly this is because you can roll in funds from almost any other retirement plan into the Solo 401k. But what happens if you want to roll over funds from a 401k that has an outstanding participant loan?
Are you still able to roll those funds over? Can the loan simply “carry over” and you keep paying on it?
First, let’s determine your options on rollovers.
- Rollover the existing 401k without paying back the loan first. If you take this route, the unpaid loan amount will be considered by the IRS to be a taxable distribution. You will be required to pay taxes on this money. If you are under age 59 ½ there is also a 10% early withdrawal penalty on those funds.
- Complete a partial rollover. Many plan administrators don’t allow this as an option. Contact your current administrator to see if this is allowed and if you have enough funds to go this route.
- Pay back the loan in a lump sum and then rollover the entire account. This is the method most clients prefer to use. With a Nabers Group Solo 401k, you can take a participant loan immediately upon funding your plan. If you need to take out another participant loan once the funds are rolled over, you can do so.
Sue has $100,000 she wants to roll over from a previous employer 401k. She wants to roll those funds into her new Solo 401k with Nabers Group. However, she took out a participant loan with her previous employer’s 401(k) last year and she still owes $10,000. Her best option is to pay the $10,000 back to the current 401k, rollover the entire $100,000, and then take a new participant loan from her Solo 401k.
Because Sue would rollover the lump sum without an outstanding loan, she could take another loan from her Solo 401k as soon as her documents are created and her plan is funded.
If Sue were to rollover her 401k without paying back the loan, she would only have $90,000 left to rollover. She would also have to pay taxes and any applicable penalties on the $10,000 that is now considered distributed by the IRS.
However, if Sue were to first pay back the $10,000 loan, rollover her entire $100,000 and then take out a new participant loan with her new Solo 401k, she would still have $100,000 with which to make future investments. She wouldn’t have to pay taxes on the rollover and would have no distributions to keep track of.
Learn more about the Instant Line of Credit, also known as a Participant Loan.
How would you handle your rollover in this situation? Let us know in the comments below!