Few people realize it, but there’s a way to borrow money without begging a bank, without paying a dime of interest to Visa or Mastercard, and without subjecting yourself to a credit check.
You borrow from yourself.
If you’re self-employed and have a Solo 401(k), you can actually take a loan from your own retirement account. And the best part? The interest doesn’t go to Chase, Citi, or Wells Fargo. It goes right back to you.
That’s right — you’re the borrower and the lender. Here’s a real-life example…
Back in 2016, my wife and I bought a rental property in Boston. It was a red-hot market — homes listed for one price were selling for tens of thousands more. Buyers were waiving inspections. Cash-only offers were everywhere.
The property we wanted was listed at $585,000. To compete, we had to offer $625,000 cash. One problem: I didn’t have all the cash I needed.
So, I pulled three levers:
- Borrowed against my stock portfolio with a securities line of credit.
- Tapped the home equity line on my primary residence.
- Borrowed $50,000 from my Solo 401(k).
That last piece — the 401(k) loan — sealed the deal. It gave us the liquidity to make a cash offer and close quickly. And unlike the bank loans, every dollar of interest on that Solo 401(k) loan went straight back into my own retirement account.
Why This Works (and the Rules to Know)
Here’s the deal:
- Loan Limit: Up to $50,000 or 50% of your vested balance, whichever is less.
- Repayment Terms: 5 years max (unless it’s for a primary residence).
- Interest Rate: Variable, typically prime +1%. Paid back to yourself.
- Flexibility: Use it for whatever you want. The IRS doesn’t care if it’s for a down payment, debt payoff, or even a new business idea.
Sounds too good to be true? The catch is you’ve got to repay it on time. Miss payments, and the IRS treats it as a taxable distribution (plus a 10% penalty if you’re under 59½).
Comparing Funding Sources Side by Side
When I pulled money from three places to fund that Boston property, each source came with different risks and payback priorities. Here’s how they stacked up:
| Funding Source | Interest Rate | Who Gets the Interest | What’s at Risk if You Can’t Pay Back | My Payback Priority |
|---|---|---|---|---|
| Home Equity Line of Credit (primary residence) | Variable | Chase (the bank) | Foreclosure risk — you could lose your home | #1 (highest) |
| Securities Line of Credit (against stock portfolio) | Variable | JPMorgan (the bank) | Bank can liquidate your stocks immediately | #2 (moderate risk) |
| Solo 401(k) Loan | Variable | Yourself (interest goes back into your account) | Treated as a distribution if you default → taxes + 10% penalty | #3 (lowest risk) |
Notice how the Solo 401(k) loan looks completely different. The “lender” is you, and the “worst-case scenario” is essentially a taxable withdrawal with a 10% penalty. Compare that to a margin call from JPMorgan or a foreclosure notice from Chase — the math is obvious.
That’s exactly why I paid back my Solo 401(k) loan last. I wanted to eliminate the risks that involved third parties first.
Takeaway
Most investors never even think about borrowing from their retirement account. The “default” advice is don’t touch it until you’re 59½.
And for the most part, that’s smart. But sometimes life throws you an opportunity — or a curveball — and you need liquidity fast.
When that happens, a Solo 401(k) loan can be a powerful, contrarian move. You skip the bank. You skip the fees. You keep the interest in your own ecosystem.
In my case, it was one of three creative funding levers that helped me close on a rental property in one of the toughest markets in the country. Without it, I would have lost the deal.
So yes — borrowing from your retirement account sounds taboo. But used responsibly, it’s one of the rare times in finance where you really can be your own banker.
Good investing!
Greg Patrick
Source: Dividends & Income
