Solo 401k Loans Explained: What You Should Know Before Borrowing

Looking to open a Solo 401k plan? Get started today – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a Mega Backdoor Roth conversion.

A Solo 401k loan allows you to borrow money from your own Solo 401k account balance without triggering taxes or penalties—if you follow IRS repayment rules. In effect, you’re lending money to yourself, with interest, and agreeing to repay it over time. 

While borrowing from your retirement savings involves risk, a Solo 401k loan could provide short-term financial flexibility in certain situations, especially when compared to high-interest credit cards or personal loans. Solo 401k loans typically don’t require a credit check and may be processed faster than conventional loans, depending on your provider.

The IRS does not limit how the borrowed funds can be used, but strict repayment rules apply. And while interest is paid back into your account, the borrowed funds are temporarily removed from your investment portfolio, potentially reducing tax-deferred earnings.

This guide walks through how Solo 401k loans work, what to consider before borrowing, and the trade-offs involved.

How Do I Qualify for a Solo 401k Loan?

✅ Your Solo 401k plan must allow loans.

Solo 401k loans are optional features and must be explicitly included in your plan documents.

✅ You must have a vested account balance. 

Only the vested portion of your Solo 401k can be borrowed against.

✅ No income or employment verification required by the IRS.

Will I Need Good Credit to Qualify?

No. A Solo 401k loan does not require a credit check. The loan is backed by your account balance. However, if not repaid properly, it may be treated as a taxable distribution.

Can I Use the Money for Anything?

Yes. There are no restrictions on how Solo 401k loan funds are used. Whether you need the money for personal expenses or business costs, how you spend it is up to you.

However, even though the use of funds is flexible, the repayment rules are strict.

You’re borrowing from your own retirement savings and repaying the loan, with interest, back into your Solo 401k. If you fail to repay the loan according to the agreement, the outstanding balance may be considered a taxable distribution and could be subject to income taxes and a 10 percent early withdrawal penalty if you’re under age 59 ½.

How Much Can I Borrow?

With a Solo 401k loan, you can borrow up to 50% of your account’s vested value, up to a maximum of $50,000. You cannot get a loan over $50,000, even if your balance exceeds that amount.

✏️ Hypothetical Examples:

Your Plan Value  Depends on Vested Balance, But Liquidity Matters Too

Your Solo 401k loan limit is based on your vested account balance, which includes all assets in your plan — whether in cash, mutual funds, ETFs, real estate, or other investments.

However, in practice, you can only borrow what your account can pay out in cash. That means if most of your funds are invested in illiquid assets, you may need to convert those investments into cash before taking out a loan.

✏️ Hypothetical Example:
Suppose your Solo 401k account is worth $500,000, but $450,000 is invested in ETFs, real estate, and stocks, and only $50,000 is held in cash. While the IRS would allow you to borrow up to $50,000, you’d only be able to take $25,000 unless you convert more of your portfolio into liquid cash. To borrow the full $50,000, you’d need at least $100,000 available in cash.

📝 Note: Always check with your plan provider. Some might require you to have the full loan amount available in cash before initiating the loan.

What If I Borrowed More Than My Limit?

Whether it was by accident or not, any amount over the maximum allowed is treated as an early-distribution. The money is subject to a 10% penalty fee plus ordinary income taxes.

✏️ Hypothetical Example: If your Solo 401k has $20,000, the most you can borrow is $10,000. If you take out a loan of$15,000 instead, the extra $5,000 would be subject to a 10 percent penalty ($500) plus income taxes based on your tax bracket.

Can My Spouse and I Both Take Out a Solo 401k Loan?

Yes. If both you and your spouse have Solo 401k accounts that allow loans, each of you may take out a loan based on your individual account limits. The IRS loan cap applies per person, so your household could potentially access a combined total of up to $100,000, assuming both accounts meet the criteria.

What Are the Interest Rates?

The interest rate on a Solo 401k loan typically depends on your plan provider. In most cases, it’s the prime rate plus one or two percent, but the exact amount can vary depending on the provider’s loan terms. 

However, plan providers are not allowed to set interest rates arbitrarily. The IRS requires that loan terms, including interest rates, be comparable to what a bank would charge for a similar loan. 

Each loan application must clearly document the interest rate and repayment terms to show that it complies with IRS guidelines.

When  Do You Have to Repay a Solo 401k Loan?

A Solo 401k loan must typically be repaid within five years (60 months). Even though you’re paying the money back to your own account, the loan still has to follow IRS rules for timing and structure.

If the loan is used to purchase a primary residence, the repayment term may be extended beyond five years. The specific term is determined by your plan provider, but it must be clearly documented in the loan agreement and considered reasonable under IRS guidelines. 

The repayment schedule is also set by your plan provider, but the IRS requires equal, periodic payments to be made at least once per quarter.

Should I Take a Solo 401k Loan?

A Solo 401k loan may offer fast, flexible access to your retirement funds — but it’s not without trade-offs. You’ll pay interest, and the borrowed funds won’t be invested, which could potentially limit tax-deferred growth. And if you don’t repay the loan on time, the unpaid amount is treated as a taxable distribution, possibly with a 10% early withdrawal penalty.

Still, there are some situations where taking a loan might make sense:

✅ You have poor credit and can’t get approved for a traditional loan. Solo 401k loans don’t require credit checks.

✅ You’re paying off high-interest debt (like a credit card debt that’s costing you 20% APR) and want to replace it with a lower-interest loan.

✅ You want to lend money at a higher rate. If you can confidently earn more by lending the funds than you’ll pay in loan interest, it might make sense. However, for most people, keeping their retirement savings invested, may offer stronger long-term potential.

✅ You’re starting a business and want to invest in your own venture. This may be reasonable if you believe in the long-term return and have a solid repayment plan.

✅ You need quick access to cash for personal or emergency reasons. Solo 401k loans are often faster to obtain than traditional bank loans, with fewer restrictions.

Can You Take Multiple Solo 401k Loans at Once?

Yes, it’s possible to have multiple loans from your Solo 401k plan simultaneously, provided your plan’s terms allow it.

The IRS permits participants to take multiple loans, but the total outstanding loan balance must not exceed $50,000 or 50% of your vested account balance. Each loan still needs to follow IRS rules on its own. That means adhering to the five-year repayment period (unless it’s for a primary residence) and making regular, equal payments at least once per quarter. 

Be sure to check your plan details — some Solo 401k plans don’t allow more than one loan at a time.​

📌 Wondering how to get a Solo 401k loan with Carry? Here’s everything you need to know.

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