Solo 401k Loans: Complete Guide for 2025

Everything you need to know about borrowing from your retirement plan

What Are Solo 401k Loans?

A Solo 401k loan allows self-employed individuals to borrow from their retirement savings without incurring taxes or penalties, provided the loan meets specific IRS requirements. This feature is only available if your plan document includes loan provisions.

Unlike withdrawals, loans must be repaid with interest to your retirement account, preserving your long-term retirement savings while providing access to funds when needed.

2025 Solo 401k Loan Limits

For 2025, IRS regulations limit Solo 401k loans to:

  • Maximum loan amount: The lesser of:
    • 50% of your vested account balance
    • $50,000
  • Minimum loan amount: Typically $1,000 (depending on provider)
  • Outstanding loans: The $50,000 maximum is reduced by the highest outstanding loan balance during the previous 12 months

Example: If your Solo 401k balance is $150,000, you can borrow up to $50,000. If your balance is $80,000, you can borrow up to $40,000 (50% of $80,000).

Loan Terms & Repayment

Required Terms

  • Maximum term: 5 years (longer terms available for primary residence purchases)
  • Interest rate: Prime rate + 1-2% (typically around 8.5-9.5% in 2025)
  • Repayment frequency: At least quarterly payments in substantially equal amounts
  • Documentation: Formal loan agreement with specified terms

Repayment Considerations

  • Interest payments go back into your retirement account
  • Loan payments are made with after-tax dollars, creating potential double taxation on interest
  • Missed payments or default triggers taxes and penalties if not cured within the grace period
  • Full repayment required within 60-90 days if you terminate your plan

Tax Implications

  • When borrowed properly: Loan proceeds are not taxable income
  • Default consequences: If you fail to make payments according to the loan terms:
    • The outstanding balance becomes a deemed distribution
    • Subject to income tax in the year of default
    • 10% early withdrawal penalty if you're under 59½ (unless exceptions apply)
  • Double taxation concern: Since repayments are made with after-tax dollars, and withdrawals in retirement will be taxed again (for Traditional accounts), the interest portion faces potential double taxation

Pros and Cons of Solo 401k Loans

Benefits
  • No credit check - Approval is not dependent on credit score
  • Fast access to funds - Typically much quicker than bank loans
  • Lower interest rates than many credit cards or personal loans
  • Interest repaid to yourself rather than to a lender
  • No penalties as long as terms are met
  • Flexible use - No restrictions on how funds are used
Drawbacks
  • Opportunity cost of removed investments not growing in the market
  • Risk of default and associated tax consequences
  • Double taxation of interest payments
  • Repayment acceleration if plan termination
  • Administrative complexity and potential fees
  • Not all providers offer loan provisions

Which Providers Offer Solo 401k Loans?

Not all Solo 401k providers include loan provisions in their plans. Here's a quick overview of major providers:

Loans Available

  • E*TRADE - Full loan capabilities
  • MySolo401k - Custom plans with loan provisions
  • Nabers Group - Includes loan options
  • Ubiquity - Offers loan features

No Loan Options

  • Fidelity - Does not offer loans
  • Vanguard - No loan provisions
  • Charles Schwab - Does not support loans

See our providers comparison for more details

When to Consider a Solo 401k Loan

Solo 401k loans may be appropriate in certain situations:

  • Short-term cash needs with a clear repayment plan
  • Home down payment when other options are limited
  • Debt consolidation if the interest rate is lower than existing debt
  • Business investment with strong potential return
  • Emergency expenses when other emergency funds are exhausted

Important: Always consider alternatives first, such as emergency funds, home equity loans, or traditional financing options. Retirement savings should typically be a last resort for current financial needs.

Alternatives to Solo 401k Loans

Before borrowing from your retirement:

  • Emergency fund - Use savings designated for emergencies
  • Home equity - May offer tax advantages (consult a tax professional)
  • Business line of credit - Keeps business and retirement separate
  • Roth IRA contributions - Can be withdrawn tax-free at any time
  • Adjust contribution strategy - Temporarily reduce contributions for cash flow

Conclusion

Solo 401k loans can provide self-employed individuals with access to retirement funds without the penalties associated with early withdrawals. However, they come with significant responsibilities and potential drawbacks.

When considering a loan from your Solo 401k, carefully weigh the impact on your retirement savings, evaluate alternatives, and ensure you have a solid repayment plan in place. Review your plan documents to confirm loan provisions are included or consider switching to a provider that offers this feature if it's important to your financial strategy.

For more information on Solo 401k plans, explore our guides on eligibility, contribution limits, and provider comparisons.