One advantage of an Individual 401k versus other small business retirement plans such as a SEP IRA, Simple IRA or Keogh retirement plan is the ability to receive a loan using the accumulated balance of the Individual 401k as collateral. Provided an Individual 401k has a loan provision, Individual 401k loans are permitted up to 50% of the total value of the Individual 401k up to a maximum of $50,000.
In general, Individual 401k loans are repaid monthly over a 5 year term. An Individual 401k loan used for the purchase of a primary residence may have a 15 year term. 401k loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms will result in a loan default causing taxes as well as IRS penalties.
The simplicity and ease of an Individual 401k loan is a key benefit and may be considered a valuable feature for many small business owners. Note: An Individual 401k loan is not a debt instrument. The loan is not made by a bank or lending institution. With a 401k loan you are simply borrowing your own money from your 401k. Since you are borrowing your own money, principal and interest payments are paid back into your own 401k (not to a bank). The interest rate for the 401k loan can be as low as the Prime Rate (3.25%).
Example: A small business owner sets up an Individual 401k and transfers $50,000 from a 401k plan from an ex-employer, $25,000 from a SEP IRA and $25,000 from a Rollover IRA.
In this example the small business owner could get a 401k loan up to $50,000. A loan up to 50% the value of the 401k is permitted up to a $50,000 maximum. In this example, a client would have a $50,000 balance remaining in their Individual 401k and would receive a check for $50,000 for the loan. The $50,000 loan is received tax free and provided loan payments are repaid on time, then there are no taxes due.
Small business loans are often needed by small business owners, entrepreneurs and self employed individuals. Getting a small business loan through banks and lending institutions can be difficult. Potentially there is a simple solution. Many small business owners are getting loans up to $50,000 using an Individual 401k loan as a small business loan because 401k loans are fast, easy to obtain and have favorable interest rates.
If you are eligible for an Individual 401k and you have existing retirement accounts, then there is a simple solution to getting a loan. You can setup your own Individual 401k, can transfer your retirement accounts into the Individual 401k and then you use your 401k money as collateral to get a loan. You can get a loan up to 50% of the value of the Individual 401k up to a maximum of $50,000.
Since you are using your Individual 401k balance as collateral, you are automatically approved for the loan. There are no credit checks so the loan is particularly appealing for those with bad credit. Loan interest rates can be as low as the Prime rate (3.25%) and because you are borrowing your money, the interest and principal is repaid back to yourself. Monthly loan payments are made into your Individual 401k (not to a bank) over 5 years.
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