ALEXANDRIA, VA – When seeking money to boost their new business many entrepreneurs are turning to the Solo 401(k) to get a loan, says Lamaute Capital, Inc., an investment firm specializing in retirement plans.
Solo 401(k) retirement plans with a loan feature first became available after the tax law changes of 2001. These changes allowed a business owner to take a loan from his 401(k) account and therefore avoid the 10% tax penalty generally associated with early withdrawals. In the past year Lamaute Capital reports seeing increased traffic on its website www.Click2Borrow.com from business owners interested in the Solo 401(k) and its loan feature.
The Solo 401(k), also called a Self-Employed 401(k) or Individual 401(k), is designed for businesses with no employees. Most owners initially fund their Solo 401(k) plan by rolling over an existing IRA, 401(k) from a previous employer, or other tax deferred retirement funds into the plan. They can then borrow up to the lesser of $50,000 or 50-percent of the balance in their Solo 401(k).
A loan from a Solo 401(k) is fast to obtain because one is in effect taking the money from his account. In many cases the 401(k) loan interest is fixed at prime rate for the duration of the loan, generally five years or more. The loan payments, interest and principal, are put back in the 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 schedule 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.
Another feature of the Solo 401(k) attracting attention is its generous contribution limits. The contribution for a 401(k) is calculated in a way that lets the account owner put away a greater tax-deductible contribution than is often 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. This 401(k) is not suitable for companies with employees, or those that plan to hire employees. The deadline to establish a Solo 401(k) is December 31 or the business tax year-end.
