Solo 401(k) Loans: Rules, Cost, and When to Use Them
Borrow up to 50% of vested balance, max $50,000, repaid over 5 years. Interest goes to your own account. Default at the wrong time and the IRS bills it as income.
Solo 401(k) loans are a real edge over the SEP IRA, which doesn't allow them at all. They're also wildly misunderstood. Here's the actual mechanics.
Maximum loan
50% of your vested balance, capped at $50,000. So a $200,000 plan can lend you $50,000. A $60,000 plan can lend you $30,000. Below about $20,000 in plan assets it's hard to make the loan worth the paperwork.
Repayment terms
5 years standard, 15 years if used for primary residence purchase. Quarterly payments minimum, though most providers do monthly. Interest rate is set by the plan, typically prime + 1% or +2% (so around 8-9% in mid-2026 with prime at 7.5%).
Where the interest goes
This is the part everyone misses. Loan interest is paid back into your own Solo 401(k) account. So you're paying yourself the interest. The "cost" of the loan is the opportunity cost of whatever those dollars would have earned in the market, typically 7%+ historically, so the math is roughly a wash if interest rates are 8%.
The default trap
Miss a payment by more than 90 days and the IRS treats the entire outstanding loan balance as a deemed distribution. You get hit with income tax on the full amount plus a 10% early withdrawal penalty if you're under 59½. So a $40k unpaid loan can become a $13k tax bill at the 24% bracket.
The leaving-the-plan trap
If you close the Solo 401(k) (typically because you hired an employee or sold the business) while a loan is outstanding, the loan must be repaid in full immediately or it becomes a deemed distribution. SECURE Act extended the repayment window to the tax filing deadline (so April 15 of the next year), giving you some breathing room.
When loans actually make sense
1) Bridge financing for a known short-term need. 2) Avoiding higher-cost debt during a rough patch. 3) Real estate down payment where alternative financing is even more expensive. They almost never make sense for "investment opportunities" or "starting a business", both common pitches that ignore the default risk.
When they don't
1) You're considering it because you want to time the market, please no. 2) Your business is volatile and you might lose income before the loan is repaid. 3) You're already maxing your contributions; borrowing reduces the compounding base by exactly the loan amount.
Provider differences
Vanguard's prototype Solo 401(k) historically did not offer loans. Fidelity, Schwab, E*TRADE, mySolo401k, Carry all do. If loans matter, check before you set up the plan.