Recommend a 401K plan which permits borrowing.
November 24, 2012 9:39 AM   Subscribe

Please recommend a 401K plan for a single person business that permits borrowing.

I have a single person business, and a healthy retirement account with Vanguard. I'd like to borrow against the account (I've researched this extensively, so please no arguing this point), but Vanguard doesn't permit this.

Consequently, I need recommendations for a retirement account that I can roll over some of the funds, and then take a loan from it.

Other than the borrowing aspect, I am a fairly conservative investor; I typically buy index funds for the long term.
posted by portabella to Work & Money (8 answers total)
That's strange. I have a Vanguard plan, and they do allow borrowing from it--up to two loans at a time, and interest is paid to your plan. I'm unsure of the particular plan name/ID, but I can assure you that I have and do borrow from it.
posted by Verdandi at 10:25 AM on November 24, 2012

If you haven't been, try asking specifically about "solo 401(k)s." In my limited experience, Solo 401(k)s are more likely to permit borrowing than regular 401(k)s are, even "off-the-shelf" Solo-ks.

I am more familiar with traditional 401(k)s and the ones that permit borrowing were written and administrated by a Third Party Administrator (TPA). That means paying someone. Allowing borrowing means tracking repayment schedules, etc, and most companies aren't going to want to do that for free, which is what you're sort of asking for when you look for an off-the-shelf 401(k) plan. Again, though, the plans I'm thinking of aren't solo 401(k)s, and obviously tracking a large company's employees' loans will take a lot more work than tracking the loans of one person.

If you're new to this, you might consider using a TPA or at least an investment advisor. It's a little complex and screwing it up could cost you.
posted by small_ruminant at 10:47 AM on November 24, 2012 [1 favorite]

Verdandi, is your 401(k) through your employer? If so, they may have paid a TPA to write a plan for Vanguard to use. The payout and repayment calculations would be the responsibility of the TPA, and so would the liability be the TPA's. This would be very common.
posted by small_ruminant at 10:49 AM on November 24, 2012

Verdandi, a Vanguard representative told me specifically: "Vanguard does not offer an employer plan for sole proprietors where you can borrow money". Like small_ruminant said, my guess is that you have a 401(k) via your employer.

And yes, it's exactly an off-the-shelf plan that I'm looking for.
posted by portabella at 1:21 PM on November 24, 2012

If the existing 401(k) is with an old employer, roll it over to an IRA then withdraw the funds directly. Pay the penalties and have done with it.

Once you roll it over, it's not in your old employer's 401(k). It's rarely a good idea to leave your 401(k) with an old employer, so doing this is a good thing.

401(k) borrowing is typically limited to purchasing your home or hardship. Not random withdrawls.

When I borrowed from my 401(k), when I got laid off from the company the entire balance was due and I had to pay it in a lump sum. So it's very common for limits to be placed on borrowing.

This being the case, does it make sense for you to take the money from your retirement account?

If this is to infuse your business with cash, what if you lose it all? Will it be worth it?
posted by Ruthless Bunny at 7:18 AM on November 25, 2012

portabella, I don't think you'll have much luck with the big discount brokerages. I don't think Schwab, Vanguard, OR Fidelity (my 3 go-to discount brokerages) will allow borrowing. There are a zillion new custodians these days though, that aren't as user friendly but allow all sorts of things. ExpertPlan? FolioFN? There are some that only do 401ks.
posted by small_ruminant at 9:03 AM on November 25, 2012

Apparently, E*Trade offers an individual 401K that you can borrow against:
posted by portabella at 12:44 PM on November 25, 2012 [1 favorite]

Good to know, thanks. I looked them up yesterday and didn't find that.
posted by small_ruminant at 12:48 PM on November 25, 2012

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