401(k) Loans Boost Business Startups
Solo 401(k) retirement plans with a loan feature first became available in 2002 as a result of tax law changes that lifted restrictions on business owners getting a loan from their 401(k) plan. This change is important because in most cases when one withdraws money from a retirement account prior to age 59 ½ they are hit with a 10% tax penalty on top of the regular income tax. A 401(k) loan, on the other hand does not trigger these tax consequences as long as the loan is repaid according to IRS guidelines.
Lamaute Capital, Inc., an investment firm specializing in retirement plans, reports seeing increased traffic on its website Click2Borrow.com from small businesses interested in the loan feature of the Solo 401(k).
The Solo 401(k) - also called a Self-Employed 401(k) or Individual 401k) - is designed for businesses with no employees. You can initially fund a Solo 401(k) plan by rolling over an existing IRA, 401(k) from a previous employer, or other qualified retirement funds into the plan. Once the funds are in the plan you can borrow up to the lesser of $50,000 or 50 percent of the balance in your Solo 401(k).
A loan from a Solo 401(k) is fast to obtain because you are in effect taking the money from your retirement account. In many cases the 401(k) loan interest rate is fixed at prime rate for the duration of the loan, generally five years or more. All of the loan payments, interest and principal, are put back in your 401(k) account.
Although a loan from a 401(k) plan is free of tax and early withdrawal penalty, if the loan is not paid back on time the IRS will treat the balance of the loan as a distribution subject to taxes and a possible 10% penalty. Also 401(k) loan payments are not tax deductible.
Besides its loan feature, the Solo 401(k) plan is attracting attention because of its generous contribution limits. The contribution formula for a 401(k) often allows the account owner to put away a greater tax-deductible contribution than is generally possible thru older plans such as the Keogh, SEP IRA or SIMPLE IRA.
The Solo 401(k) is available to any business that employs only owners and their spouses, including C corporations, S corporations, partnerships, and sole proprietors working part-time or full-time in their businesses. The Solo 401(k) is not suitable for businesses with employees, or those that plan to hire employees. Not all Solo 401(k) plans come with the loan feature, so shop around. The deadline to establish a Solo 401(k) plan is the business tax year-end which means December 31, for most companies.
Source Lamaute Capital, Inc.