A Solo 401(k) can let you borrow from your own balance, but only if the plan document you adopted says so. The IRS limit is the lesser of 50% of your vested balance or $50,000, and you generally have five years to repay it, with payments at least quarterly. If the loan misses those rules, the IRS treats it as a distribution and you owe income tax on it, plus the 10% early distribution tax if you’re under 59½.
That last part is where freelancers get hurt. A salaried employee repays through payroll. A freelancer has to find the payment in a slow month. This guide covers the limits, the repayment rules, and how to decide whether a loan makes sense before you open a plan, which is when the choice is easiest to make. If you haven’t set up the plan, start with how to open a Solo 401(k).
Who can borrow
Only plans that contain loan provisions can lend. The IRS says plan sponsors are not required to include them, and that 401(k), profit-sharing, 403(b) and similar plans may offer loans while IRAs and IRA-based plans cannot. In a Solo 401(k) you’re both the sponsor and the participant, which makes it easy to assume you can lend yourself anything. The plan document still controls. It may allow loans, forbid them, or set a lower limit or shorter term than the IRS maximum, and the IRS notes plans can do that.
The IRS adds that a loan doesn’t depend on hardship. As long as the plan provides for loans, the reason for borrowing is irrelevant, and being the owner doesn’t stop you from borrowing when all participants can take loans under the plan’s terms. A Solo 401(k) is an ordinary 401(k) with one participant, so these rules apply to it as they do to a large employer’s plan. If you have added a spouse to the plan, note that some plans require the spouse’s written consent for a loan above $5,000.
Two practical consequences. First, ask before you adopt the plan whether it allows loans. Second, a SEP IRA can never lend, so if access to the money matters to you, that’s one real difference between the two.
How much you can borrow
| Vested balance | 50% of balance | Maximum loan under the IRS rule |
|---|---|---|
| $16,000 | $8,000 | Up to $10,000, if the plan includes the exception |
| $40,000 | $20,000 | $20,000 |
| $80,000 | $40,000 | $40,000 |
| $120,000 | $60,000 | $50,000 |
$16,000
- 50% of balance
- $8,000
- Maximum loan under the IRS rule
- Up to $10,000, if the plan includes the exception
$40,000
- 50% of balance
- $20,000
- Maximum loan under the IRS rule
- $20,000
$80,000
- 50% of balance
- $40,000
- Maximum loan under the IRS rule
- $40,000
$120,000
- 50% of balance
- $60,000
- Maximum loan under the IRS rule
- $50,000
Source: IRS, Retirement topics, plan loans, and Retirement plans FAQs regarding loans. The $80,000 and $120,000 cases match the IRS's own examples; the other rows are our arithmetic from the same rule. A plan may set a lower limit. Earlier loans can reduce the $50,000 figure.
The IRS adds that outstanding loans from the previous year can lower the $50,000 cap. If you’ve borrowed before, the plan administrator works that out, and the cap isn’t just the headline number. One more reason to read your plan document: the $10,000 exception is optional, so a small account may get no loan at all.
How repayment works
The IRS sets three conditions for a loan to stay out of income. It must be within the dollar limit, repaid within five years unless used to buy your primary residence, and repaid in substantially level installments at least quarterly. Quarterly is the minimum frequency, so a plan can require more frequent payments.
On a $20,000 loan over five years there are 20 quarterly payments, so $1,000 of principal each quarter before interest. The IRS pages we used don’t give an interest rate, so check what your plan documents say. The point of the number is the cash flow: $1,000 a quarter has to come from somewhere whether the quarter was good or not.
A second loan, using the IRS formula
A plan may allow more than one loan at a time, but the IRS looks back 12 months. The new loan plus every outstanding loan balance cannot exceed the lesser of two numbers: $50,000 reduced by how far your highest loan balance in the past 12 months exceeds your balance today, or the greater of $10,000 or half your vested balance.
Here is a hypothetical case. Your vested balance is $60,000. Earlier this year you borrowed $20,000 and still owe $12,000. The first number is $50,000 minus ($20,000 minus $12,000), which is $42,000. The second is half of $60,000, which is $30,000. The lesser is $30,000, and after subtracting the $12,000 you owe, a second loan could be up to $18,000. Paying off the first loan before asking would not raise the total you can owe, which stays at $30,000. The formula comes from the IRS loan FAQs and the figures are our arithmetic.
One related point: loan repayments are not plan contributions, so they don’t count against your annual contribution limit under the 2026 rules.
What happens if you miss payments
This is the rule that matters most. The IRS says a loan that exceeds the maximum is a deemed distribution only for the excess, but a loan that fails the five-year and quarterly payment requirements makes the whole loan taxable, including the part within the dollar limit. The deemed distribution is subject to income tax, may carry the 10% additional tax, and can’t be rolled over.
Take the $20,000 loan from above, unpaid. The full $20,000 goes into your income for the year, and if you’re under 59½ the 10% tax is another $2,000 on top of the income tax. The IRS adds that if you stay in the plan, you still owe the repayments after a deemed distribution, and those amounts count as basis and won’t be taxed again when later withdrawn.
Watch out
Before you borrow, read your plan’s rules for late payments. The IRS says plans can have stricter terms than the law, and the document may allow a cure period or none at all. Don’t assume a grace period exists.
When a missed payment becomes a distribution
The IRS FAQ says a loan in default is generally treated as a taxable distribution of the entire outstanding balance. It also says a plan may provide that the loan doesn’t become a deemed distribution until the end of the calendar quarter after the quarter in which the payment was missed. The IRS example uses payments due March 31, June 30, September 30 and December 31. If you make the March payment and miss June, the loan is in default at the end of June and is treated as a distribution at the end of September. That window exists only if your plan document provides it.
Too much borrowed, or paid late afterward
If the loan only exceeds the dollar limit, just the excess is taxable. The IRS example is a $60,000 loan, which creates a $10,000 deemed distribution. With a $120,000 balance, where our table shows a $50,000 cap, that same $60,000 request would be $10,000 over, and a borrower under 59½ could face the 10% additional tax on that $10,000, which is $1,000, on top of income tax.
A deemed distribution doesn’t cancel the debt. The IRS says treating the loan as a distribution doesn’t excuse you from repaying it, and that you can still make the missed payments afterward, which increases your tax basis by the late repayments. A deemed distribution also can’t be rolled over.
Closing the business or ending the plan
Freelancers stop working, move to a job or wind down a business. If that ends the plan, the IRS says the sponsor may require the full outstanding loan balance to be repaid. When the balance isn’t repaid, the plan may reduce your account by the unpaid loan, which the IRS calls a plan loan offset. Unlike a deemed distribution, an offset is treated as an actual distribution for rollover purposes. When it results from plan termination, you have until the due date, including extensions, of the tax return for the year of the offset to roll it over. If you are planning to close the business or switch to a job with its own plan, check the balance before you do, and see how a Solo 401(k) works next to a workplace 401(k).
If a loan was set up wrong
The IRS offers correction programs for plan loan failures, under its Employee Plans Compliance Resolution System. The IRS describes these programs as relief for employers, and in a one-participant plan the owner holds both roles, so ask a plan professional whether they fit your case. Correction is allowed only if the normal maximum repayment period hasn’t expired. The IRS example is a loan set at six years, found to be wrong two years in, which is corrected by reamortizing the balance over the remaining 3 years. This is a case for a retirement plan professional rather than a do-it-yourself fix.
Why freelancers should size a loan to the worst quarter
The usual advice is to borrow only what you can afford to repay. For a freelancer, that has to mean the lean quarter, not the average one. If your income swings, look at your lowest quarter in the past two years and ask whether you could make the payment out of that quarter alone while also covering estimated taxes and living costs. If you can’t, the safer move is a smaller loan or none.
There’s a second cost that doesn’t show up as a penalty. Money you borrow stops being invested for the term of the loan. The retirement savings guide for irregular income covers building a cushion first, so you’re less likely to reach for the account when a slow stretch arrives. Our Solo 401(k) contribution calculator shows how much room you have to contribute under the 2026 limits.
What to check in your plan document
- Whether loans are allowed at all, and the maximum amount and term the plan sets.
- Whether the plan allows the exception for balances under $20,000, which is where the $10,000 floor applies.
- The repayment schedule, the interest rate and who sets it.
- What happens if you stop contributing, close the business or terminate the plan with a loan outstanding. The IRS says a sponsor may require a participant to repay the full balance when employment ends, and otherwise the unpaid amount is a distribution.
- Whether the plan has a grace period for a late payment.
How we got these rules
The loan limits, the $10,000 exception, the five-year term, the quarterly payment requirement, the primary-residence exception, the treatment of deemed distributions, the 10% tax and the statement that plans need not offer loans or may set stricter limits come from the IRS pages on plan loans, the IRS loan FAQs and its plan fix-it guide on loan failures. The point that IRAs and IRA-based plans cannot offer loans comes from the IRS plan loan page. We opened them, along with the IRS one-participant 401(k) page, on October 14, 2026. The second loan formula, the excess-loan treatment, the quarter-after default option, the plan loan offset rollover period and the correction example come from the same IRS pages. The table rows and the $18,000, $1,000 and $2,000 figures are our own arithmetic from those rules, and the second loan and $120,000 cases are hypothetical. We did not use any provider’s marketing pages. For how we choose sources, see How We Research.
This is general information, not tax or financial advice. Loan terms depend on your plan document, and a loan can affect your taxes and retirement savings, so talk to your plan provider or a tax professional before borrowing.
