BACKGROUND/QUESTION: Specifically, we plan to use the funds as a loan from the 401k to buy inventory, at the moment $25k a batch, then pay the 401k back with 10% on the loan once the units are sold (usually takes about 2 to 3 months), so practically a 90 day loan. We make $3,750 profit on the $25K, we would then pay $27,500 back to the Solo 401k (the original borrowed plus 10%) and keep the remaining $1,250 in the company as profit.
Our (maybe optimistic) idea is that most of the profit ($2,500 of the $3,750) then goes into our 401k and thus builds our retirement pot, rather than if we just kept it in the company we would have to pay tax on that money. We know we have to pay tax on that money in the solo 401k when we retire and take the money out, but right now we need every cent we can make to invest in and grow the business. We thought this a reasonable split so that at least the govt. gets some tax revenue.
Is the above model acceptable to the IRS?
ANSWER: This will not work as it will run afoul with the solo 401k regulations.
1. The maximum you can borrow from a solo 401k is 50% of the 401(k) balance not to exceed 50,000 (see following links for more on this
http://www.mysolo401k.net/solo-401k-participant-loan-facts-borrowing-solo-401k-2/
http://www.mysolo401k.net/solo-401k/solo-401k-loan/ ). For example if the balance of your 401(k) is 50,000 the maximum you can borrow is 25,000. On the other hand if the balance of your 401(k) is 200,000 the maximum you can borrow is 50,000. The loan would be to you and then you can use the funds however you wish because they would no longer be considered solo 401k funds.
What is more the interest rate is determined by the IRS rules. The interest rate is the prime rate plus one point so I would be 4.25%. Also, the minimum loan period is five years. Payments are made monthly or quarterly over a five-year. Consisting of principal and interest payments.
Also the RS has a 12 month loan restriction to keep people from churning their 401(k) for loans. To read more about his restriction visit the following link.
http://www.mysolo401k.net/multiple-solo-401k-loan-questions/
2. Unfortunately you cannot loan your 401(k) directly to your corporation it because that is your business. It doesn't matter whether it's a corporation, LLC or sole proprietorship. What matters is that it is your business it is prohibited to loan your solo 401k funds to your own business. Therefore, you can only do this through a 401(k) loan as mentioned above in number one above.
Our (maybe optimistic) idea is that most of the profit ($2,500 of the $3,750) then goes into our 401k and thus builds our retirement pot, rather than if we just kept it in the company we would have to pay tax on that money. We know we have to pay tax on that money in the solo 401k when we retire and take the money out, but right now we need every cent we can make to invest in and grow the business. We thought this a reasonable split so that at least the govt. gets some tax revenue.
Is the above model acceptable to the IRS?
ANSWER: This will not work as it will run afoul with the solo 401k regulations.
1. The maximum you can borrow from a solo 401k is 50% of the 401(k) balance not to exceed 50,000 (see following links for more on this
http://www.mysolo401k.net/solo-401k-participant-loan-facts-borrowing-solo-401k-2/
http://www.mysolo401k.net/solo-401k/solo-401k-loan/ ). For example if the balance of your 401(k) is 50,000 the maximum you can borrow is 25,000. On the other hand if the balance of your 401(k) is 200,000 the maximum you can borrow is 50,000. The loan would be to you and then you can use the funds however you wish because they would no longer be considered solo 401k funds.
What is more the interest rate is determined by the IRS rules. The interest rate is the prime rate plus one point so I would be 4.25%. Also, the minimum loan period is five years. Payments are made monthly or quarterly over a five-year. Consisting of principal and interest payments.
Also the RS has a 12 month loan restriction to keep people from churning their 401(k) for loans. To read more about his restriction visit the following link.
http://www.mysolo401k.net/multiple-solo-401k-loan-questions/
2. Unfortunately you cannot loan your 401(k) directly to your corporation it because that is your business. It doesn't matter whether it's a corporation, LLC or sole proprietorship. What matters is that it is your business it is prohibited to loan your solo 401k funds to your own business. Therefore, you can only do this through a 401(k) loan as mentioned above in number one above.
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