I will be buying a new home, soon. How can I use my self-directed 401K as part of the down payment?
Here are some possible options for tapping into your self-directed 401k (aka solo 401k plan) for accessing funds for your primary residence purchase:
Over age 59 1/2: If the solo 401k account holder is over age 59 1/2, he or she can distribute any of the solo 401k funds penalty free (that is, the 10% early distribution penalty is waived). Of course, federal taxes, and possibly state taxes also apply.
Under Age 59 1/2: On the other hand, if the account holder is under age 59 1/2, he or she can distribute any funds previously transferred to the solo 401k from an IRA or a former employer plan; however, the 10% early distribution penalty applies on top of federal taxes, and possibly state taxes.
Under Age 59 1/2 and Distribution Exception: If your solo 401k only contains annual contributions and you are under age 59 1/2, you can use the "Principal Residence" exception to access funds for use in the purchase of your primary residence. However, the 10% early distribution penalty still applies as well as federal taxes, and possibly state taxes.
Participant Loan: Just like traditional 401k plans allow for loans, the account holder may borrow from his solo 401k plan even before the occurrence of a distribution-triggering event. Under the solo 401k participant loan rules, the solo 401k account holder can borrow 50% of his solo 401k balance not to exceed $50,000.
For example, if the balance of your solo 401k (including investments) is $125,000, the maximum that you can borrow from your solo 401k plan is $50,000.
On the other hand, if the balance of your solo 401k is $90,000 (including investments), the maximum loan amount available is $45,000. VISIT HERE to learn more about the solo 401k participant loan rules.