Solo 401(k) loan rules allow borrowing up to $50,000, but only when the plan document includes loan provisions.
A solo 401(k) loan is allowed only if the plan document permits loans. The limit is the lesser of $50,000 or 50% of the vested balance (a plan may allow up to $10,000 on smaller balances). The loan must be repaid within 5 years in level payments at least quarterly, or the unpaid balance becomes a taxable deemed distribution.
Key Takeaways
- A plan loan is limited to the lesser of $50,000 or the greater of $10,000 or 50% of the vested balance, and the $50,000 is reduced by the highest outstanding loan balance in the prior 12 months (26 U.S.C. 72(p)(2)(A)).
- Repayment must finish within 5 years (longer only for a principal residence) in substantially level payments made at least quarterly (IRS Retirement Plan Loan FAQs).
- A missed payment can be cured no later than the last day of the calendar quarter after the quarter it was due; after that, the entire outstanding balance plus accrued interest is a deemed distribution (Treas. Reg. 1.72(p)-1, Q&A-10).
- Interest on a plan loan to a key employee is not deductible, and a 5% owner is a key employee, so a solo 401(k) owner cannot deduct it (26 U.S.C. 416(i)).
- Form 5500-EZ line 9 asks for participant loans outstanding at year end once one-participant plan assets exceed $250,000; late filing carries a penalty of $250 a day, up to $150,000 per plan year (Instructions for Form 5500-EZ).
Four Numbers Behind Every Solo 401(k) Loan
These are federal maximums. A solo 401(k) can offer loans only if its plan document includes loan provisions, and the plan's own loan policy can be stricter.
What are the solo 401(k) loan rules in 2026?
Solo 401(k) loans follow the same federal loan rules as any 401(k), plus prohibited transaction rules because the borrower also runs the plan. The IRS loan FAQs confirm that IRA-based plans such as SEP and SIMPLE IRAs cannot permit loans at all.
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The $50,000 figure in section 72(p) is not indexed for inflation. What changed for 2026 is how much can go in: a $24,500 employee deferral and a $72,000 total limit, covered in solo 401(k) contribution limits for 2026.
| Rule | Requirement | Primary source |
|---|---|---|
| Plan permission | The plan document must contain loan provisions, often through a written loan policy | IRC 4975(d)(1)(C) |
| Maximum amount | Lesser of $50,000 (reduced by the 12-month look-back) or the greater of 50% of the vested balance or $10,000 | IRC 72(p)(2)(A) |
| Term | 5 years maximum; a principal residence loan may run longer under the plan's terms | IRC 72(p)(2)(B) |
| Payments | Substantially level amortization, at least quarterly | IRC 72(p)(2)(C) |
| Paperwork | Legally enforceable agreement stating the amount, date and repayment schedule, on paper or electronically | Treas. Reg. 1.72(p)-1, Q&A-3 |
| Interest rate | Reasonable, and not more favorable than a financial institution would charge on a similarly secured loan | IRC 4975(d)(1)(D); IRS Fix-It Guide |
| Security | Adequately secured, normally by the vested account balance | IRC 4975(d)(1)(E) |
| Default | Outstanding balance becomes a deemed distribution after any cure period | Treas. Reg. 1.72(p)-1, Q&A-10 |
How much can you borrow from a solo 401(k)?
The maximum is the lesser of $50,000 or half of the vested balance, with a plan option to lend up to $10,000 when half the balance is smaller. Section 72(p)(2)(A) of the Internal Revenue Code phrases the second test as "the greater of" one-half of the vested benefit or $10,000, but a plan has to adopt that exception, and many solo 401(k) documents use the plain 50% rule.
The rule that most often trips up repeat borrowers is the 12-month look-back. The $50,000 cap is reduced by the highest outstanding loan balance during the year ending the day before the new loan, minus whatever is still outstanding on the new loan date. Repaying a loan does not instantly restore full borrowing room.
Worked example (hypothetical). A 45-year-old sole proprietor has an $84,000 vested solo 401(k) balance on April 1, 2026. She borrowed $30,000 in June 2025 and repaid it in full in February 2026.
- 50% test: half of $84,000 is $42,000.
- Dollar test: $50,000 minus ($30,000 highest balance in the prior 12 months minus $0 outstanding today) equals $20,000.
- Maximum new loan: the lesser figure, $20,000.
The reduction shrinks as older balances age out of the 12-month window and disappears a full year after the payoff.
Victims of a federally declared disaster can access more. Section 72(p)(6) raises the limit to $100,000 and up to 100% of the vested balance for qualified individuals during the applicable period, and lets repayments due in the incident window be delayed for 1 year.
How do solo 401(k) loan repayments work without payroll?
Repayments must be level, include principal and interest, and arrive at least quarterly, and in a one-person business the owner sends them manually. A sole proprietor usually has no payroll deduction, so each payment is a transfer from a personal account to the plan's trust account on the loan agreement's schedule.
Continuing the example, the owner borrows $20,000 at a hypothetical 8% annual rate over 5 years. The interest rate must be comparable to what a lender would charge on a similarly secured loan, according to the IRS 401(k) Fix-It Guide.
| Schedule (hypothetical 8% rate) | Payments | Payment amount | Total interest paid to the plan |
|---|---|---|---|
| Quarterly, 5 years | 20 | $1,223.13 | $4,462.69 |
| Monthly, 5 years | 60 | $405.53 | $4,331.67 |
The interest is credited to the owner's own account, not a bank. The real cost is the investment return the borrowed dollars miss while out of the market, which may be more or less than the interest rate.
Loan repayments are not contributions, so they do not use up any of the $72,000 annual addition limit. A principal residence loan can run longer than 5 years if the plan allows, as using a 401(k) to buy a house explains. The IRS loan FAQs also let a plan suspend repayments for up to one year during a leave of absence, and for longer during military service.
What happens if you miss a solo 401(k) loan payment?
A missed payment becomes a deemed distribution of the entire outstanding balance unless it is made up by the end of the cure period. Under Treas. Reg. 1.72(p)-1, Q&A-10, a plan administrator may allow a cure period that runs no later than the last day of the calendar quarter after the quarter in which the payment was due.
Continuing the example. After five quarterly payments, the balance is $15,716.38. If the payment due September 30, 2027 is missed, the latest possible cure date is December 31, 2027. If it is still unpaid then, roughly $16,351 (the principal plus interest accrued to that date) is a deemed distribution. At a hypothetical 24% federal bracket plus the 10% additional tax for a 45-year-old, the federal cost would be about $5,560, before any state tax.
Three consequences often surprise borrowers:
- The debt does not disappear. Under Q&A-19 of the regulation, a deemed-distributed loan that has not been repaid still counts as outstanding when the plan applies the limits to any future loan.
- Later repayments create basis. Under Q&A-21, cash repaid after a deemed distribution increases the participant's tax basis in the plan, so that money is not taxed a second time when withdrawn.
- Roth money is not automatically safe. A deemed distribution from a designated Roth account follows the normal Roth rules, so earnings can be taxable if the distribution is not qualified.
The 10% penalty works the same way as on an actual withdrawal; see the 401(k) early withdrawal penalty for the exceptions. A default also adds income in a year that might otherwise have room for a planned Roth conversion, a timing issue covered in Roth conversions in a low-income year.
The IRS Voluntary Correction Program can sometimes relieve a loan failure, but the IRS Fix-It Guide says reporting relief generally requires that an employer action or inaction caused the missed payment. In a one-person plan, the cure period is usually the practical safety net.
Why does the plan document matter, and when is a loan a prohibited transaction?
A loan that is not made under the plan's own written loan provisions can fail the prohibited transaction exemption, not just the tax rules. Section 4975(d)(1) of the Internal Revenue Code exempts a participant loan only if it is made under specific plan provisions, bears a reasonable rate of interest and is adequately secured, among other conditions.
Owners can use that exemption because section 4975(f)(6)(B)(iii) narrows the owner-employee loan restriction to IRA participants, so it does not block a sole proprietor's solo 401(k) loan. IRAs remain off limits, a difference explored in SEP IRA vs solo 401(k).
A loan outside those conditions, such as the plan lending to the owner's company or a family member, triggers a 15% excise tax on the amount involved for each year, rising to 100% if not corrected. See the self-directed 401(k) guide.
A plan covering only an owner, or an owner and spouse, is not an ERISA Title I plan under 29 CFR 2510.3-3, so the tax code rules above govern. Hiring an eligible employee changes that, and loans must then be available to all participants on a reasonably equivalent basis.
Is solo 401(k) loan interest tax deductible?
No, a solo 401(k) owner generally cannot deduct the interest, even on a loan used to buy a home. Section 72(p)(3) denies any deduction for interest on a plan loan for a period when the borrower is a key employee, and section 416(i) defines a 5% owner as a key employee.
A related misconception is that every dollar repaid is "taxed twice." The loan proceeds arrived tax free, which offsets repaying principal with after-tax dollars; only the interest, paid with after-tax dollars into a pre-tax account, is taxed again when withdrawn. On the hypothetical $20,000 loan, that is the $4,462.69 of interest, not the full $24,462.69 repaid.
How do you take a solo 401(k) loan, step by step?
The owner is both borrower and plan administrator, so the process is mostly documentation that tracks section 72(p) and Q&A-3 of the regulation:
- Confirm the plan allows loans. Check the adoption agreement and loan policy; if loans are not included, the document would need an amendment or a different provider before any loan. Setup basics are in how to open a solo 401(k).
- Calculate the limit. Use the vested balance on the loan date and the 12-month look-back.
- Set a reasonable rate and sign the agreement. Document the rate against commercial rates and state the amount, date and an amortization schedule with payments at least quarterly.
- Fund it from the plan account. The transfer goes from the plan's trust account to the participant.
- Repay on schedule and keep records. Calendar every due date, since no payroll system will catch a missed payment.
Alternatives are compared in 401(k) loan vs withdrawal and 401(k) hardship withdrawal rules; prepayment is covered in paying off a 401(k) loan early.
What happens to a solo 401(k) loan when you close the business?
If the plan terminates with a loan in good standing, the outstanding balance is usually offset against the account, and that offset can be rolled over to avoid tax. Under section 402(c)(3)(C) of the Internal Revenue Code, a qualified plan loan offset caused by plan termination or severance from employment can be rolled over until the due date, including extensions, of the tax return for the year of the offset.
The rollover has to be funded with other cash, because the offset repaid the loan rather than paying anything out. A defaulted loan, by contrast, is a deemed distribution that cannot be rolled over.
How are solo 401(k) loans reported to the IRS?
A loan in good standing is reported only on Form 5500-EZ, and only once the plan must file. The IRS one-participant 401(k) page says a plan generally must file Form 5500-EZ if it has $250,000 or more in assets at year end; the Form 5500-EZ instructions use a more than $250,000 test that combines all of the employer's one-participant plans and require a filing in the final plan year regardless of size.
- Line 9: check yes if the plan had participant loans during the year and enter the year-end amount, including accrued unpaid interest but excluding deemed-distributed loans.
- Due date: the last day of the 7th month after the plan year ends, which is July 31 for a calendar-year plan.
- Penalty: $250 a day, up to $150,000 per plan year, for late filing under section 6652(e).
Defaulted loans are reported on Form 1099-R with code L, and offsets with code M, according to the Form 1099-R instructions.
Frequently asked questions
Can I use a solo 401(k) loan to fund my business?
Section 72(p) does not restrict how a participant spends loan proceeds. What matters is who borrows: the plan may lend to the owner as a participant under its loan provisions, but the plan lending directly to the owner’s business can be a prohibited transaction under Internal Revenue Code section 4975.
Is solo 401(k) loan interest tax deductible?
Generally no. Section 72(p)(3) denies an interest deduction on a plan loan to a key employee, and section 416(i) treats a 5% owner as a key employee, so the interest is not deductible even when the loan buys a home.
Can I have more than one solo 401(k) loan at a time?
Only if the plan’s loan policy allows it. All loans from the plan are added together for the $50,000 and 50% limits, and the $50,000 cap is reduced by the highest outstanding balance during the prior 12 months.
What happens to my solo 401(k) loan if I close my business?
If the plan is terminated while the loan is in good standing, the plan typically offsets the account balance to repay the loan. That qualified plan loan offset is taxable unless the owner rolls an equal amount into an IRA or another plan by the due date, including extensions, of the tax return for the year of the offset, under section 402(c)(3)(C).
Do solo 401(k) loans go on Form 5500-EZ?
Yes, when the plan must file. Line 9 of Form 5500-EZ asks whether the plan had participant loans during the year and the amount outstanding at year end, excluding loans already deemed distributed. Plans with $250,000 or less in combined one-participant plan assets are generally exempt, except in the final plan year.
Can I pay off a solo 401(k) loan early?
Usually yes. Federal law sets a maximum term, not a minimum one, so most loan policies permit prepayment without a penalty. The $50,000 cap can stay reduced for up to 12 months after the payoff because of the look-back rule.
Can I borrow from a SEP IRA or a SIMPLE IRA instead?
No. The IRS states that IRAs and IRA-based plans such as SEP and SIMPLE IRAs cannot permit loans. Among common self-employed plans, only a 401(k) or another qualified plan can include a loan feature.
Methodology: Every rule was checked against primary sources: Internal Revenue Code sections 72(p), 402(c), 416(i) and 4975, Treas. Reg. 1.72(p)-1, 29 CFR 2510.3-3, IRS loan FAQs and Fix-It Guide, and current Form 5500-EZ and 1099-R instructions. Dollar examples are hypothetical with a stated rate and bracket. Because this is a financial topic, anonymous forum anecdotes and unsourced provider claims were excluded.
This article is for educational purposes only and is not individualized investment, tax, or legal advice. Consult a qualified professional about your specific situation.
