Dmitriy Fomichenko goes over Solo 401K Participation Loans and how you can use them to fund your investments without having penalties or taxes.
Learn more about using your retirement funds to get a deal done and what the repayment process normally is.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Dmitriy: Hello, my name is Dmitriy with Sense Financial. We’re in the Real Estate Investing Classroom. And today, we are going to be talking about how to access your retirement funds tax-free and penalties-free before you retire using a solo 401(k) participant loan.
Mike: This show was sponsored by passiverental.com.
Dmitriy: The topic of today’s lesson is solo 401(k) participant loan. And I’m going to explain to you how to access your retirement funds before you retire tax-free and penalty-free. Well, first of all, what is a solo 401(k)?
A solo 401(k) is a qualified retirement plan designed for those people who are self-employed or own a small business without full-time employees. And this qualified plan can be self-directed and it comes with very, very powerful features that are not available within an IRA, which makes this plan superior to a self-directed IRA. And one of the features that are available is the solo 401(k) participant loan.
Just like a conventional 401(k), for those of you who have a 401(k) at your employer or used to have one, you know or may be aware that it comes with participant loan. The participant loan allows you to borrow money from your 401(k) before you retire. The loan limit is set at $50,000 or 50% of the limit, or 50% of the balance in your account. And you can access these funds at any time for any reason whatsoever. And many of our clients use this to access the funds in their retirement account and then perhaps buy a property and flip it. This way then, they don’t have to put all of the profits back into the retirement account and they can keep the profits and just pay the loan back plus the interest.
Again, it can be used for any reason at any time. You can actually have up to three outstanding loans at the same time. And it allows you to use your retirement funds to invest in a deal that otherwise might be a prohibited transaction because when you use a retirement account as a disqualified person, you’re prohibited from getting engaged in any of the transactions involving your 401(k). However, once you pull the loan out and have these funds to you, all you have to do is just pay the loan back according to the amortization schedule. But the actual investment is now done in your own name and you can do whatever you want with the funds, with the profits.
And again, a very powerful vehicle, allowing you to access the funds before retirement for any reason whatsoever. The loan terms are, again, it’s a five-year loan, must be paid using an amortized schedule, monthly or quarterly. The interest rate is set at prime plus 1%. And you can use that to pretty much invest in anything that you want.
One other fact is that if the loan is used to purchase a primary residence, the loan can be stretched out to even 15 years, even longer than the normal 5-year. Anything else, it’s a five-year loan and it must be paid back monthly or quarterly. So investigate that and see if that can be a helpful tool for you to further your investment potential.
That will be the lesson for today. Thank you for joining me in the Real Estate Investment Classroom and I’ll see you on the next show.
Mike: passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
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