Borrowing from Your Self-Directed Solo 401(k): Become Your Own Rich Uncle

The beauty of Self-Directed Solo 401(k)s is that they can be used to make a wide range of alternative investments. Rocket Dollar account holders have used their Solo 401(k)s to invest in local businesses, purchase real estate, cryptocurrencies, and many other diversified asset classes.

You also can invest in yourself by taking a loan from your Self-Directed Solo 401(k).

Invest Your Money In Yourself — On Your Terms

Prior to the Great Recession, I worked for Bank of America. In 2008, like millions of others, I was laid off and needed to find a new job. I didn’t want to work for another large corporation — I already walked that path and didn’t want to face the prospect of another layoff when the road got rocky.

I found good work as an independent contractor, and soon after I opened my first Solo 401(k) to reduce my tax burden and started away putting retirement money. However like many younger working professionals, I had student debt from college that I wanted to eliminate, so I borrowed money from my Solo 401(k) to pay back the debt.

In two years I was debt-free. It was a smart play.

The Rules Of Self-Directed Loans

Many financial advisers caution against borrowing from your 401(k). It is a vehicle to help you retire. If you pull money out, you are not giving your retirement capital the fullest opportunity to grow. However, certain life events are important and your 401(k) can be a great place to get much-needed capital.

With a Solo 401(k), you don’t have to qualify what loans are for — it is liquid money that can be drawn upon when you truly need it for important life events, such as education or for a down payment on a home. In good times you can sock as much money away as possible, and if necessary you can pull it back out.

There are some rules, though. Basically, you can borrow up to 50 percent of the account balance or $50,000, whichever is less (the 2020 CARES Act has increased this limit to $100,000 for qualified individuals). Loans must be paid back within five years unless you are borrowing to purchase your primary residence, in which case you have up to 15 years to pay back the loan.

In addition to borrowing from my Solo 401(k) to eliminate federal student loans, I also borrowed from my retirement funds to purchase a home and start a business. Between 30 to 50 percent of people who open Rocket Dollar Self-Directed Solo 401(k)s do so to take out loans. The Solo 401(k) provides access to capital that gives people the flexibility to solve crucial financial issues.

Borrowing From Your Self-Directed Solo 401(k): Rocket Dollar Makes it Easy

It took a ridiculous amount of work to find a Solo 401(k) provider when I began searching in 2008. Back then, opening a Self-directed Solo 401(k) wasn’t really a big thing. It took between 10 and 15 hours to find a provider and set up the account. The paperwork was incredibly complex, and I paid $50 a quarter to maintain the account.

It takes just minutes to set up and open an account with Rocket Dollar using our 100 percent online platform. We’ve made it simple to rollover funds from company-sponsored retirement plans.

People with Self-Directed Solo 401(k)s often are intimidated about making mistakes that will raise red flags with the Internal Revenue Service. However, with a Solo 401(k) any missteps can be easily corrected. If account holders get into situations where they have to rewrite history because they didn’t quite get all their financial recording done correctly, it’s simple to get it done right and keep them on track.

Navigating the requirements and rules about Solo 401(k)s is part of good financial diligence that account holders eventually grow into — and Rocket Dollar makes it even easier by ensuring transactions are compliant from the start. We do the legwork for you; it’s what we are good at.

Debt and taxes can be really have an impact, especially for freelancers, independent contractors, and other self-employed workers. Contributing to a retirement account solves the tax issue in a great way, and you are able to take loans from your Solo 401(k) that can solve debt problems. It’s like having a rich uncle, but you are that uncle.

Maximize your Roth contributions with a Rocket Dollar Solo 401(k)

Access our top three Roth tax saving strategies in the Rocket Dollar Guide to Roth Retirement Accounts.