Instead of tapping their IRA to raise cash many individuals are turning to the Self-Employed 401(k) with a loan feature as a method to access money from their retirement account without paying a big penalty to the IRS.
Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, small business owners - whose only employee is the owner or the owner and spouse - can open a Self-Employed 401(k) plan. A loan from a Self-Employed 401(k) is not subject to taxes and penalties as long as the loan is repaid to the plan according to IRS guidelines.
It's possible to transfer funds without dollar limit from an IRA, or 401(k) from a previous employer into a Self-Employed 401(k) account with a loan feature. The loan can be up to a maximum of $50,000 or 50% of the balance in the Self-Employed 401(k) account, whichever is less.
Most employees at big companies have the ability to borrow from their 401(k). Now even the smallest of business owners such as freelancers, consultants, and entrepreneurs can also have this advantage. It doesn't matter if you started your business last week or several years ago. Any independent contractor with 1099 income, sole proprietor, partner, LLC, or corporation, can tap into the full benefits of the Self-Employed 401K plan.
In addition to the loan feature, the Self-Employed 401(k) is an attractive retirement plan because it allows its participants to shelter more income than possible under other retirement plan alternatives. For example, in tax year 2006, an individual and his business can contribute a maximum of $49,000 to a Self-Employed 401(k).
You may visit www.investsafe.com for more on the Self-Employed 401(k) loan or to access a free calculator to help you estimate what your maximum contribution might be under different retirement plans.