Self-Directed 401(K) Loans

Generally, a participant is not permitted to make a withdrawal from an account under an employer-sponsored retirement plan, until that employee experiences a triggering event[1]. A loan is an exception to this requirement, allowing employees to take loans from their account balances under an employer sponsored retirement plan regardless of whether they experience any triggering events.

Loans are available to an employee, only if the employer’s plan includes a feature allowing loans.

Loans may not be made from Self-Directed IRAs. Loans may be made from accounts under employer sponsored retirement plans[2].

A loan is nontaxable, providing it meets statutory requirements, which include limitations on the amount and repayment periods.

This document provides an overview of the rules that apply to these loans.

Self-Directed 401(K) Loan General Loan Requirements

The following are the general requirements that a loan and loan program must meet:

  • Must be made available to all participants and beneficiaries under the plan on a reasonably equivalent basis;
  • Must not be made available to highly compensated employees, officers or shareholders in an amount greater than the amount made available to other employees;
  • Must be made in accordance with specific provisions regarding loans as provided under the plan;
  • Must bear a reasonable rate of interest; and
  • Must be adequately secured.

Self-Directed 401(K) Maximum Loan Amount

The maximum amount that a participant may borrow is the lesser of:

  • 50% of his/her vested account balance, or
  • $50,000

A plan may allow a participant to borrow up to 50%, even if it is more than 50% of that participant’s vested account balance. However, the dollar amount can never exceed $50,000[3].

A plan may allow participants to have multiple loans (per participant) from the plan at the same time. In these cases, the plan administrator must perform a more complex calculation to ensure that the outstanding loan balance does not exceed statutory limit.

Self-Directed 401(K) Repayment Period

Loans must be repaid in substantially equal amounts that include principal and interest, and repayments must be made at least quarterly.

The payment period should not exceed 5-years, unless the loan was taken for the purpose of purchasing the employee’s principal residence.

For loans taken by employees performing military service, repayments may be suspended.

Self-Directed 401(K) Deemed Distributions and Offsets

While loans are generally not treated as distributions, exceptions apply. Under these exceptions, a loan can be treated as a deemed distribution or an offset.  And, whether the amount is eligible to be rolled over depends on whether it’s a deemed distribution or an offset.

Deemed Distribution

A loan that fails to meet the statutory requirements would be ‘in default’. Examples include loans that exceed the statutory limit and the permitted repayment terms.

A loan that is in default is generally treated as ordinary income to the participant, with any pre-tax amount being taxable.

A deemed distribution is not a true distribution, and therefore cannot be rolled over.

The Plan Document should be consulted to determine when a loan becomes a deemed distribution, and how deemed distributions should be handled.


An offset typically occurs when a participant’s employment is terminated with the employer, and the participant has an outstanding loan balance. If the loan is not repaid, the participant’s account balance can be offset (reduced) for the outstanding loan amount.

An offset is a true distribution, because it occurs as a result of the participant experiencing a triggering event. As such, it can be rolled over (as long as the amount is rollover eligible).

If a plan loan is offset against a participant’s balance, the amount can be rolled over within 60-days. However, if the offset occurs as a result of the participant’s termination of employment or the termination of the plan, the usual 60-day period for completing rollovers is extended to the participant’s tax filing due date, including extensions, for the year in which the offset occurs[4].

Self-Directed Solo 401(K) Plan Administrator Services Required

The administration of loans is a complicated process, and the services of a plan administrator should be engaged to ensure compliance with regulatory requirements as well as to ensure that loans are handled in accordance with the terms of the governing plan document.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at


[1] Meeting a requirement to make a withdrawal, such as reaching retirement age or no longer working for the employer

[2] Qualified plan, such as a 401(k) or pension plan, 403(b) and governmental 457(b)

[3] Exceptions can apply. For example, the dollar limit was increased to $100,000 and the percentage limit increased to 100% for plan participants affected by Hurricanes Harvey, Irma, or Maria- from August 23, 2017 (affected by Harvey), September 4, 2017 (affected by Irma), or September 16, 2017 (affected by Maria), through December 31, 2018.

[4] Tax Cuts and Jobs Act (Pub. L. No. 115-97)

Baby Boomer, Gen X Retirement Saving Inadequate, Study Says

When it comes to retirement saving, the Baby Boomer generation is in trouble.

Despite many of them now entering retirement, the majority of those born between 1946 and 1964 report having less than $250,000 in retirement assets. Only about 1 in 3 Boomers has that much saved up – leading to a retirement income shortfall of between $3,864 and $12,072, according to research from the Insured Retirement Institute.

And things are not looking too great for Gen Xers, either. According to the Insured Retirement Institute’s (IRI) fourth biennial report on Generation X, about 4 in 10 members of this generational cohort do not have money saved for their retirement. Despite an overall improvement in the economy, this represents a deterioration of about 5 percentage points from two years ago.

Of those with retirement savings, about 6 in 10 have saved less than $250,000. On the other hand, the percentage of those who have saved at least $250,000 or more has nearly doubled over the same time frame, rising from 12 percent in early 2016 to 23 percent in 2018.

According to the IRI, about 60 percent of Generation X respondents report being generally confident they will have enough money saved for retirement. Their top three economic concerns are changes in Social Security (66 percent), higher than expected health care expenses (64 percent) in retirement and running out of money (59 percent).

Ultimately, people across the generations need to get serious about putting money away.

Use “Catch-Up Contribution Limits”

The Baby Boomers and the oldest of the Generation Xers can both take advantage of “catch-up contribution” limits, available to those ages 50 and older. Congress anticipated the need for older Americans to sock more money away as they enter their peak earning years and their children have reached adulthood.

For Self-Directed IRAs, individuals age 50 and older can put an additional $1,000 away each year in combined Roth IRA and Traditional IRA contributions – over and above the normal $6,500 annual limit. Some limitations apply for those at higher income levels.

Older Self-Directed 401(k) beneficiaries can also increase salary deferral contributions. As of 2018, those ages 50 and older can contribute an additional $6,000 per year to employer-sponsored Self-Directed 401(k) plans, on top of the generally applicable $18,500 contributions, for a total potential employee contribution of $24,500 per year.

Similar provisions also apply to 403(b) plans, the federal Thrift Savings Plan and many Section 457 deferred compensation plans for public employees. They also apply to Self-Directed 401(k)s and small business Self-Directed 401(k)s.

Those turning 50 and older this year should consider taking full advantage of these more generous tax-advantaged compensation limits.

Working longer

Many Americans will have little choice but to stay in the work force longer and put off retirement. This means more years of earning an income, and more years of potential retirement contributions and compounding within retirement accounts. It also means higher monthly Social Security benefits, if you can put off collecting Social Security until you reach full retirement age.

Staying in the work force also means you do not have to stretch your retirement income over as many years. With today’s advances in health care and nutrition, it has grown commonplace for Americans to live into their late 80s and 90s. Taking income out of your portfolio for 10 years rather than 20 years can make a big difference in the sustainability of your retirement income.

For more information on getting started with Self-Directed IRA investing, call American IRA today at 866-7500-IRA (472).

Self-Directed 401k – Using Loans To Make Investments

One of the most powerful features of the Self-Directed Solo 401k plan is the ability of plan sponsors to structure their plans to allow for loans against the 401(k) balance. This feature is a popular one, as small business owners are keenly aware of the problem of temporary cash crunches disrupting business activity.

However, owners of Self-Directed Solo 401k or conventional Self-Directed 401k plans should use caution before committing loan funds to investments in certain circumstances. This is because it’s very easy for Self-Directed Solo 401k owners to run afoul of prohibited transaction rules when they use 401(k) loan proceeds to make investments.

Here’s why:

Under Internal Revenue Code Section 4975, disqualified persons (that’s you, the owner, along with your spouse, children, grandchildren, parents and grandparents and those of your spouse) cannot personally guarantee loans made from within your solo 401(k) plan. Any loan that you or any prohibited person must personally sign to guarantee, or for which you or any other prohibited person must put up collateral other than the purchased investment for inside the 401(k) is likely going to break the rule. Any participant in the 401(k) plan is likely considered a disqualified person under IRC 4975.

You can borrow money against your 401(k) for any purpose, but you cannot then pour those proceeds back into a 401(k) investment if you are personally guaranteeing the debt. All mortgages on property held within a solo 401(k) account (or any other tax-advantaged retirement plan, for that matter) must be taken on a non-recourse basis. The lender must have no option to go after you or anyone else in the event of a debt default, other than to foreclose on the property within the 401(k).

So when does it make sense to take out a loan from a 401(k)? It can be a good strategy if you simply need access to cash to bridge a short-term liquidity need – one you expect to be able to pay off in a year or so. One good example: Purchasing a car or truck for business use for a corporation, LLC or partnership – especially one that sponsors your Solo 401(k) plan. Many real estate investors we know who own solo 401(k)s occasionally use loans against their Solo 401(k)s to pay for contractors to get an apartment or house ready to rent – and then aggressively pay back the 401(k) loan with the rent proceeds. If it weren’t for the 401(k) loan option, in some cases they wouldn’t have the cash they needed to turn the rental around immediately, and the home would go unoccupied and idle for that much longer. A 401(k) loan may enable them to get a tenant in the property much sooner – and that would be worth any interest on the 401(k) loan many times over.

Note: Anyone who uses 401(k) loans should be aware that while the original contributions were pre-tax, they must repay the loan with after-tax dollars.

Invest in Real Estate with your Self-Directed 401k

puzzle_piece_house_outline_800_wht_4232Many people want to invest in real estate “if I could only find the cash for the down payment on a property or two.” But for many would be investors – the answer to getting started in direct real estate investment is right under their nose: You can use a Self-Directed 401k to invest in real estate.


For Employees

If you don’t own your own company so you can become the sponsor of your own Self-Directed 401k plan, you have a couple of options:

Borrow. If your plan allows, you may be able to borrow up to $50,000 or 50% of your account value (whichever is less) to invest in real estate in a taxable account. If you go this route, understand you only have five years to repay the loan. Otherwise it’s considered a taxable distribution and if you are under age 59½, may generate penalties to boot.

Execute a Rollover. If it’s a 401k from an old employer, or if your plan allows in-service rollovers, you may consider rolling over some or all of your 401k balance to your own IRA. There you have a couple of options: You can pay income taxes on the rollover and start a Roth IRA (thereby gaining the advantage of tax-free growth forever in exchange for a near-term tax hit), or continue with the tax-deferred approach.

In this case, in a traditional IRA, your real estate investment will (hopefully) grow tax-deferred. Rental income is also tax-deferred – just reinvest it within your IRA until you are ready to take distributions. Required minimum distributions, of course, still apply starting April 1st of the year after the year in which you turn 70 ½. Distributions are taxable as ordinary income. Any gains attributable to money borrowed from outside the IRA may also be taxed under unrelated debt-financed income tax rules.

In the case of a Roth IRA, since you already paid income taxes on the money, growth and rental income are tax-free, as long as the money remains in the Roth at least five years. There are no RMDs to worry about either.

[tweetthis]Getting started in direct real estate investment: You can use a #SelfDirected401k to invest in real estate.[/tweetthis]

If you own a business

If you own your own business, setting up your own Self-Directed Solo 401k for the purposes of owning investment property may be a compelling option for several reasons:

  • Unlike IRAs, 401k’s have no income qualification requirements. You can make a contribution to your own solo 401k, regardless of how high your income is. And if you have no other qualifying employees other than yourself and a spouse, there are no top-hat or discrimination rules to worry about, either. The solo 401k can be optimized for your benefit, to maximize the allowable contribution.
  • You can still set up the account to allow for borrowing.
  • Assets in a solo 401k enjoy substantial creditor protection
  • You may be able to avoid unrelated debt-financed income tax by holding real estate within a 401k rather than an IRA. Speak with your tax advisor for more information.
  • You can contribute much more to a solo 401k plan than you can to an IRA. While the IRA limits you to $5,500 in new contributions each year ($6,500 for those over 50), employees can contribute up to $18,000 in elective deferrals in a 401k. Meanwhile, the company can kick in between 20 and 25 percent of total compensation (up to a $265,000 compensation cap) on contributions. All told, you may be able to contribute up to $53,000 per year, tax-deferred, or tax-free if you choose to use a Roth option and contribute with after-tax money. ($59,000 if you are over 50, thanks to the effect of ‘catch-up contributions).

For more information, visit us online at, or call us for a free consultation at 866-7500-IRA(472).


Can You Use Self-Direction in a 401(k)

Self-Directed 401K, Solo 401KThe use of Self-Directed IRAs, is gaining increasing popularity and acceptance with financial advisors, the media and the financial community. However, some individuals may be frustrated with the relatively low contribution limits available with IRAs. Is it possible to take advantage of the powerful concept of a Self-Directed 401(k) plan?

It turns out that yes, you can employ a Self-Directed 401(k) plan. Indeed, there are a number of advantages in doing so. But you do need to control your 401(k) plan. Self-direction is not something you are going to be able to do with an off-the-shelf 401(k) solution from a broker-dealer or mutual fund company. And it’s not an option your employer is likely to make available for you, if you happen to work for someone else.

Solo 401(k)s

Because the owner of the business sponsoring the Traditional 401(k) plan has to approve the concept of self direction, many 401(k) plans we see that allow for self-direction are actually “solo 401(k) plans.” That is, they were designed to work for a self-employed individual, LLCs, corporations, and partnerships.

These plans work well for self-employed individuals, LLCs, corporations, and partnerships because of the low startup costs and relatively high contribution limits. You can contribute up to $17,500 per year as an employee. On top of that, the business can also contribute up to 25 percent of compensation as an employer match. (Self-employed individuals must subtract half of their self-employment tax from total compensation before calculating allowable contributions.

Those participants over 50 may contribute an additional $5,500 in “catch-up” contributions.

Advantages of Self-Directed 401(k)s

  • Relatively high contribution limits compared to IRAs
  • Tax deferral of contributions.
  • Substantial protection from creditors
  • No unrelated debt-financed income tax liability
  • Opportunity for greater diversification into different asset classes
  • Qualifies for tax credit for startup costs for small business retirement plans
  • More control over fees. Mutual funds add a substantial expense ratio to your mutual fund holdings. With self-directed investments, you control the fees.
  • Ability to borrow from 401(k)s

Self-Direction vs. Brokerage Windows

Note that Self-direction and the use of brokerage windows are not quite the same thing. A brokerage window within a 401(k) plan allows you to maintain an account with a securities broker-dealer. That allows you to buy and sell individual securities through your 401(k). So if you want to restrict yourself to trading publicly-traded stocks, bonds, ETFs and closed-end funds, and you want the freedom to make intra-day trades, a brokerage window can service this purpose.

However, there are many, many types of investments that you can make using a self-direction option within a 401(k) that you cannot make with a brokerage window. Your broker/dealer cannot help you buy an individual piece of rental property, for example.

For more information, give us a call at American IRA, at 866-7500-IRA (472). We are an experienced third-party administrator specializing in self-directed retirement accounts. We look forward to working with you!




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Jim Hitt, CEO of American IRA-A National Self-Directed IRA Provider, Answers A Frequently Asked Question…Is Retiring Through Rental Real Estate Wise?

Jim Hitt, CEO of American IRA-A National Self-Directed IRA Provider, Answers A Frequently Asked Question…Is Retiring Through Rental Real Estate Wise? Jim Hitt has over 29 years experience investing in real estate and is expertly qualified to field this important question.

Jim Hitt says “Retiring Through Rental Real Estate can be a wise decision if you are careful about your investments. There are some very important things you must do to ensure your success:

  • Do your ‘due diligence’ before you make your purchase
  • Always consult with professionals when putting together a deal
  • Use the real numbers (sometimes people are tempted to use numbers based on the profit they ‘think’ they can make instead of looking at the actual profit the investment is already making)
  • Know your market (many investors make the mistake of buying a property that is listed at a great price only to find out the price they paid is much more than the property is worth in that location).
  • Remember not to cut it too close (A common mistake investors often make is not keeping enough cash in reserve. You have got to keep cash on hand for repairs, months where you have a vacancy, taxes, insurance, and other expenses that may arise.)”

One thing people should keep in mind is that ‘retiring’ through rental real estate may or may not be fully retiring. People need to decide the level of involvement they would like to have in their retirement years with these rental properties. In this light, they can decide to be hands on landlords during their retirement years or they can decide to employ a property manager if they prefer to have a more passive role.

The other thing that people should keep in mind is that there are tremendous benefits to using a self-directed IRA or self-directed 401(k) as the funding source for rental real estate properties. The most significant benefit is tax-free or tax-deferred income streaming into their retirement account.

Jim Hitt concludes “There are far too many benefits and scenarios to include in this press release. Having said that, we are currently offering free 1-on-1 consultations and free educational videos to anyone who would like to learn more about the benefits of investing in rental real estate with self-directed IRAs and self-directed 401(k)s.”


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