Individual(k) Plan Loans: How to Borrow From Your Solo 401(k)

Running a small business often means juggling cash flow, timing, and unexpected expenses. You may need to access money for an emergency or a business opportunity and consider drawing from your retirement savings. Understanding how 401(k) plan loans work can help you borrow from your plan without triggering unnecessary taxes or penalties.

An Individual(k)—also known as a solo 401(k) or one-participant 401(k)—is a retirement plan designed for self-employed individuals and small business owners with no full-time employees other than a spouse. Taking a loan from your Individual(k) plan can offer a way to access a portion of your retirement savings without taking a distribution. Individual(k) plan loans allow you to borrow from your own retirement savings and repay yourself over time without the immediate taxes or penalties associated with a standard withdrawal.

While IRS rules for retirement plans can feel complex, the loan provision is straightforward once you understand the basics. This guide explains how loans work and outlines key 401(k) loan rules and limits, so you can make informed decisions for your financial future.

What is an Individual(k) plan loan?

An Individual(k) plan loan is not a withdrawal. Instead, you are borrowing money from your vested retirement account balance and agreeing to pay it back to yourself over a set time, with interest.

Not all retirement plans allow loans. To offer this feature, the plan document must include a loan provision. For Individual(k) plans, the business owner acts as both the plan sponsor and participant, which can simplify decision making but does not remove the need to follow IRS rules or the terms of the plan document.

Plan loans are designed to provide flexibility for short-term needs while keeping most retirement assets invested for the future. By taking a loan rather than a distribution, you keep your retirement savings growing tax-deferred once the funds are repaid.

Understanding solo 401(k) loan rules and limits

Before borrowing, you need to understand established 401(k) loan limits and how much you can access. 

What are the maximum borrowing limits?

IRS rules limit how much you can borrow from your Individual(k) plan. In most cases, the maximum loan amount is the lesser of:¹

• 50 percent of your vested retirement account balance, or
• $50,000

Some plans may allow smaller loans for participants with lower balances.

With Ascensus‑administered Individual(k) plans, loans are limited to 50 percent of the total vested account balance. This amount includes any vested Roth contributions.

How do multiple loans affect the limit?

Most Individual(k) plans allow only one loan per participant. This loan must be paid in full before another loan can be initiated.

If a plan permits multiple loans, all outstanding loan balances must be added together and counted toward the $50,000 limit. Regardless of how many loans the plan allows, the total amount available is still limited to $50,000 across all loans.

Who is eligible to borrow?

To take a loan, you must be eligible under your plan’s terms. Typically, this means:

• You are the plan sponsor or an eligible participant
• You have a sufficient vested balance
• You are not currently in default on another plan loan.

Some providers set a minimum loan amount, such as $1,000, to prevent the administrative burden of managing very small loans.

Repayment requirements and schedule

Taking the loan is the easy part; ensuring you repay it according to strict IRS guidelines is essential to avoid taxes and penalties.

The five-year rule

Most general-purpose Individual(k) plans must be repaid within five years. An exception may apply if the loan is used to purchase a primary residence, which can allow for a longer loan repayment term, often up to 15 or 30 years depending on the plan document.

Payment frequency

IRS rules require at least quarterly payments and in substantially equal installments. Many plans prefer or require monthly payments. You generally cannot skip payments and pay a lump sum at the end of the five years.

Payroll deduction

For business owners who pay themselves through payroll, loan repayments may be made through payroll deduction. This seamless payroll integration reduces the administrative burden for the business owner and supports consistent, on-time payments. By automating the process, you reduce the risk of default.

Interest rates: the truth about “paying yourself”

One of the most attractive features of a solo 401(k) loan is the interest arrangement.

How the rate is set

The 401(k) loan interest rate is usually determined by the prime rate plus a specific percentage, often Prime plus one percent or Prime plus two percent. The exact formula is defined in the plan document.

Paying interest to your own account

One feature of plan loans is that the interest you pay goes back into your own account, not to a bank or lender. This helps to offset the opportunity cost of taking the money out of the market.

Be aware of double taxation on 401(k) loans

Loan repayments— both principal and interest—are made with after-tax dollars. When you later withdraw those funds in retirement, they are taxed again as income. This means the interest portion of the loan is effectively taxed twice: once when you earn the money to pay it back, and again when you withdraw it in retirement, which is an important factor to consider.

Step-by-step: how to take an Individual(k) plan loan

If you decide a loan is the right option, here is the typical process for securing funds from your plan.

1. Check plan documents: confirm your plan includes a loan provision and that you meet any plan-specific requirements outlined in the plan document. If you’re unsure, contact your plan administrator for details.
2. Determine your limit: calculate the maximum amount you can borrow based on your vested balance.
3. Submit an application: complete a 401(k) loan application through your plan sponsor or recordkeeper. For most Ascensus Individual(k) plans, this can be submitted through the participant portal.*
4. Review and approve: once approved, review the loan terms document carefully. It will outline your interest rate, repayment schedule, and any conditions for loan disbursement.
5. Receive funds: For Ascensus Individual(k) plans, approved loan funds are typically sent by check based on the plan’s disbursement process.*
6. Begin repayment: set up your repayment schedule, preferably through payroll deduction, to start immediately and avoid default risk.

*Balance Forward Individual(k) plans follow a slightly different process because Ascensus does not hold plan assets.

• We use your latest custodian statements to calculate how much you can borrow.
• You will submit a loan application via paper form, not through a participant portal.
• Ascensus and the custodian work together to determine the loanable amount and release funds. The fee check is issued and sent by the custodian.
• Because the assets are not held by Ascensus, the loan fee cannot be paid from plan assets.

Loan conversion

If your plan is moving to Ascensus—or transitioning within Ascensus to a product that allows loans—the loan conversion process must be completed first. This typically takes 6–8 weeks before you can request a new loan. During this time, confirm details with your plan administrator to avoid delays.

Benefits and drawbacks of taking a solo 401(k) loan

Borrowing from your future self is a major financial decision. It helps to weigh the 401(k) loan pros and cons carefully, considering the advantages, risks, and opportunity cost before moving forward.

Potential advantages

• Access cash quickly without a credit check.
• No immediate tax impact if you follow the repayment rules.
• Interest paid goes back into your own account.
• Few restrictions on how funds are used (unlike hardship withdrawals).

Potential risks

• Money borrowed is out of the market, creating an opportunity cost if investments perform well and you miss out on that investment growth.
• Interest is paid with after-tax dollars, which are taxed again upon distribution.
• Risk of taxes and penalties if the loan defaults.
• You need cash flow for repayments, which can add stress if business slows.

The risks: loan default and leaving the business

The biggest risk associated with plan loans is default. It changes a tax-free loan into a taxable event.

What is 401(k) loan default?

Missing payments beyond the grace period—typically the end of the calendar quarter following the quarter in which the payment was missed—puts the loan in default.²

What are the tax consequences?

If a loan defaults, the outstanding balance is treated as a taxable distribution. You will owe ordinary income tax on the unpaid amount. If you are under age 59 and a half, a ten percent early withdrawal penalty is usually added to your tax bill.

What happens if I leave the company?

If a participant is leaving their job with a 401(k) loan or the plan is terminated, the outstanding loan usually becomes due immediately or must be repaid within a very short window. If you cannot repay it, the remaining balance is deemed a distribution, triggering taxes and potential penalties.

Individual(k) loan compliance and best practices for plan sponsors

As the plan sponsor, you have a fiduciary responsibility to adhere to the plan document and manage the plan in the best interest of participants (which includes yourself).

• Ensure your plan allows loans before taking one.
• Keep a clear written loan policy specifying the number of loans allowed and the interest rate formula. Update your Summary Plan Description (SPD) accordingly.
• Be aware that some plans require spousal consent before a loan is approved, protecting the spouse's interest in the retirement benefits.
• Try to continue making regular retirement contributions even while repaying a loan. Stopping contributions can significantly affect your long-term savings goals.

This article is for general educational purposes. Plan sponsors should consult their legal, tax, or financial advisors for guidance.

What to consider before borrowing from your solo 401(k)

An Individual(k) plan loan can be a useful tool for small business owners when used carefully and in alignment with your plan rules, bridging the gap during cash crunches or funding vital business opportunities. Before borrowing, it’s important to understand the limits, repayment requirements, and potential risks.

If you sponsor an Individual(k) plan with Ascensus, reviewing your plan document and loan provisions is a good first step. You may also want to speak with your financial or tax advisor to evaluate whether a loan aligns with your broader business and retirement goals.

 

¹Subject to IRS rules and limits.
²IRS. “Retirement Plans FAQs Regarding Loans.” Accessed December 23, 2025. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans