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

Rules and limits: Some solo 401(k) plans allow you to borrow money from your retirement account instead of taking a taxable withdrawal, but there are limits set by IRS rules.

Loan repayments: While you’re essentially repaying yourself, you must follow the repayment schedule, or the remaining balance can be treated as a taxable distribution.

Pros and cons: Before deciding to borrow from your future self, you should consider all the advantages, risks, and opportunity costs before moving ahead.

An Individual(k) plan loan can be a useful tool for self‑employed business owners and owner‑only businesses when used carefully and in alignment with your plan rules, helping bridge short‑term cash flow gaps or fund timely business opportunities.

If you’re considering whether borrowing from your solo 401(k) makes sense—or weighing it against a taxable withdrawal or external financing—understanding the rules, limits, and risks is essential before moving forward.

What is an Individual(k) plan loan?

An Individual(k), also commonly referred to as a solo 401(k), is designed for self‑employed individuals or businesses with no full‑time employees other than a spouse.

An Individual(k) plan loan is a way to access a portion of your retirement savings for short-term needs without taking a distribution. Instead, you borrow money from your vested retirement account balance and repay yourself over time, with interest. That way, you keep your retirement savings growing tax-deferred once the funds are repaid. This loan feature is often considered as an alternative to taking a taxable distribution, allowing you to access funds while avoiding immediate taxes and penalties—provided you follow IRS repayment rules. But 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 doesn’t remove the need to follow IRS rules or the terms of the plan document. Remember that 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.

Rules and IRS limits for Individual(k) and solo 401(k) loans

IRS rules limit how much you can borrow from your Individual(k) plan. In most cases, you can borrow up to 50% of your vested retirement account balance, but no more than $50,000.¹ Some plans may allow smaller loans for participants with lower balances.

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

How 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.

Individual(k) loan repayment requirements and schedule

If you decide to take a plan loan, you must follow the strict IRS guidelines for repayment to avoid taxes and penalties. Missing repayments or misunderstanding these rules is one of the most common ways solo 401(k) loans turn into unexpected taxable events.

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.

Loan repayment: How the interest rate is set

One of the most appealing features of a solo 401(k) loan 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.

The interest rate is usually determined by the prime rate plus a specific percentage, often prime plus 1% or prime plus 2%. The exact formula is defined in the plan document.

Be aware of double taxation on 401(k) loans

Here’s the trade-off: Loan repayments— both principal and interest—are made with after-tax dollars. When you withdraw that money in retirement, it’s taxed again as income. This means the interest portion of the loan is effectively taxed twice, which is an important factor to consider.

Pros and cons of taking a solo 401(k) loan

Borrowing from your future self is a major financial decision. For some business owners, a plan loan may feel more appealing than a taxable withdrawal or high‑interest borrowing, but it comes with trade-offs that should be carefully weighed.

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 biggest risk associated with plan loans is 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

If that happens, it changes a tax-free loan into a taxable event.

Tax consequences of defaulting on your loan

Because owner‑participants act as both employer and employee, maintaining compliance is entirely their responsibility. If a loan defaults, the outstanding balance is treated as a taxable distribution. You will owe ordinary income tax on the unpaid amount—and if you’re under age 59 ½, a 10% early withdrawal penalty is usually added to your tax bill.

What happens if the plan is terminated?

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.

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.

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.
Determine your limit: calculate the maximum amount you can borrow based on your vested balance.
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.*
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.
Receive funds: For Ascensus Individual(k) plans, approved loan funds are typically sent by check based on the plan’s disbursement process.*
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.

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

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. Here are some additional considerations:

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.

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.

Ready to get started?

If you’re evaluating whether a solo 401(k) loan aligns with your short‑term needs and long‑term retirement goals, speaking with a specialist can help clarify your options. To learn more about Individual(k) plan loans, contact us to speak with one of our retirement specialists.

For an Individual(k) Balance Forward plan, call 877-221-0238
For an Individual(k) featuring Vanguard Investments plan, call 833-688-0086
For other Individual(k) plans, call 877-221-0248