Borrowing From Your Self-Directed Solo 401(k)
One of the great benefits of a Self-Directed Solo 401(k) is the ability to borrow from your retirement account for any purpose. The loan can be secured or unsecured. If the loan is unsecured, the payment must be repaid within five years, at least quarterly. If the loan is secured by real estate, you can have payments set up for as long as 30 years.
For all loans, a promissory note is required. For real estate, a deed of trust is required. It’s not much different than making any other type of loan if you think about it. That’s available to you, and that’s going to become interesting to you in a couple of minutes as real estate investors. I think from a real estate investor’s perspective. How can I use this in my real estate business?
Why is the Self-Directed Solo 401(k) loan feature so great?
It is retirement money you can access tax free for any purpose as long as you make the payments. If you don’t make the payments, it becomes a distribution and you will pay taxes and penalties.
You can borrow up to 50% or $50,000, whichever is less. An example is if there’s $90,000 in your account, you can borrow $45,000. If it’s $120,000, you can borrow $50,000.
All of the above would not be permitted with an IRA. Here’s how it works.
Purchasing an REO with a Self-Directed Solo 401(k)
You find a $40,000 property that is an REO. They’ll only accept cash offers. You borrowed $50,000 from your Self-Directed Solo 401(k), so you make an offer in your own name or in the name of your LLC. It’s your money for any reason. That’s it. It’s easy.
You purchase the property with your retirement plan and you’re able to act fast. It’s perfectly legal. No early withdrawal penalties or taxes on your account. Here’s a real benefit; if you resell the property for a cash profit of $20,000, it belongs to you not your Self-Directed Solo 401(k). You don’t get tax deferral, but you used your retirement plan to create current income legally.
You will be responsible for the taxes on the profit. While this cannot be done with an IRA, it can be done with a Self-Directed Solo 401(k). If you want current income, that’s a way to get current income out of your retirement account.
Purchasing Your Home with a Self-Directed Solo 401(k)
Do you need a place to live? How many people say, “I’d like to use my IRA to buy a piece of property to live in.”? You can’t purchase a home for you to live in with your IRA. So, maybe you are thinking, “But I have no income to qualify for a loan!”.
Let’s say you find a home for $49,000. You can borrow $50,000 of the $125,000 you have in your Self-Directed Solo 401(k).
You still have $76,000 to invest in your Solo(k). You’re able to live in the house with the retirement plan and continue to invest for retirement with the remaining $76,000.
Purchasing a Ferrari with a Self-Directed Solo 401(k)?
That is the power of a Self-Directed Solo 401(k). You put a ton of money away, and if you happen to want to generate current income you can do that right now, or if you want to spend $50,000 on a Ferrari you can do that too!