How to Loan Yourself Money From Your Assets

Individuals can access personal funds in a loan-like manner from certain assets. This approach can provide liquidity without the need to apply for traditional external loans from banks or other financial institutions. Understanding the specific regulations and structures involved with each asset type is important to ensure these arrangements are properly managed. This can allow individuals to maintain control over their finances while addressing various needs.

Borrowing from Employer-Sponsored Retirement Plans

Individuals may borrow from employer-sponsored retirement plans (e.g., 401(k), 403(b), 457(b)) if the plan allows. Eligibility requires a vested account balance. The amount is subject to federal limits: the lesser of $50,000 or 50% of the vested account balance, as outlined in Internal Revenue Code Section 72. Plan-specific rules might impose stricter limits.

Loans from these plans usually have defined terms, including a maximum repayment period generally five years, though primary residence loans may be extended for a longer duration. The interest rate on these loans is typically set by the plan administrator, often correlating with the prime rate plus one percent. Repayments are usually made through regular payroll deductions. To apply for such a loan, individuals typically need to complete a loan application form, which may require details about the loan’s purpose, and spousal consent might be necessary depending on the plan and marital status. These forms are generally available through the plan administrator, human resources department, or an online portal provided by the plan’s recordkeeper.

Once the necessary application forms are completed, they can be submitted through various channels, including an online submission portal, mailing documents directly to the plan administrator, or submitting them to the employer’s human resources department. The processing time for these loans can vary, but funds are typically disbursed within a few business days to two weeks after a complete application is received and approved. Loan repayments are usually facilitated through automatic payroll deductions, where both principal and interest are deducted from each paycheck. The interest paid on these loans is credited back to the participant’s own retirement account.

Failure to repay the loan according to the established terms can result in significant financial consequences. If the loan is not repaid, the outstanding balance may be treated as a taxable distribution from the retirement plan, subject to ordinary income tax. Additionally, if the participant is under age 59½, an early withdrawal penalty of 10% may be assessed on the deemed distribution, as outlined in Internal Revenue Code Section 72. This taxation and potential penalty can substantially reduce retirement savings.

Borrowing from Cash Value Life Insurance Policies

Certain types of life insurance policies that accumulate cash value, like whole life and universal life policies, can serve as a source for policy loans. The cash value within these policies grows over time on a tax-deferred basis, funded by a portion of the premiums paid and investment returns. Eligibility for a policy loan is directly tied to the accumulated cash value within the policy. The interest rate on these loans is determined by the insurance company and typically accrues on the outstanding loan balance, often at a fixed rate (e.g., 5% to 8%).

The interest that accrues on an outstanding policy loan will affect the policy’s cash value and the death benefit if not repaid. Unpaid interest can be added to the loan principal, leading to compounding interest and further reducing the policy’s cash value. To request a loan, policyholders generally need to provide their policy number, the desired loan amount, and their contact details. Loan request forms or initiation processes are typically available on the insurance company’s website, through their customer service department, or by contacting a policy agent.

After completing the loan request, submission can often be done through the insurer’s online portal or by mailing the signed form. The typical timeline for receiving loan funds from a life insurance policy can range from a few business days to about two weeks. One notable characteristic of life insurance policy loans is their flexible repayment schedule; there is generally no strict repayment timeline mandated by the insurer. While regular payments are not required, interest continues to accrue on the outstanding balance, and policyholders can choose to repay the loan at their convenience, or not at all.

If the loan is not repaid, the outstanding balance, including accrued interest, will directly reduce the death benefit paid to beneficiaries. If the policy lapses with an outstanding loan balance, the unpaid loan amount can be treated as a taxable distribution to the extent it exceeds the policy’s cost basis. This can create an unexpected tax liability. While flexible, managing policy loans requires careful consideration of their long-term impact on the policy’s value and potential tax implications.

Borrowing from Your Business

An individual who owns a business can structure a loan from their business entity to themselves, especially if the business is established as a separate legal entity such as a Limited Liability Company (LLC) or a corporation. This approach requires maintaining a clear distinction between the owner and the business, which is not typically applicable for sole proprietorships unless formal corporate formalities are maintained. It is important to formally document the loan to prevent tax authorities from recharacterizing it as a taxable distribution, such as a dividend or compensation, rather than a true debt.

A formal loan agreement or promissory note is essential, detailing key components to establish the transaction as a bona fide loan. This includes a clearly stated principal amount, a reasonable interest rate, and a fixed repayment schedule. The interest rate should be at least the Applicable Federal Rate (AFR) set by the IRS. Providing collateral for the loan can further strengthen its legitimacy. Internal documentation, such as board resolutions for corporations or specific clauses within an LLC’s operating agreement, should formally authorize the loan and outline its terms, ensuring proper governance and record-keeping.

Once the loan agreement is fully executed and all required internal documentation is prepared, the funds can be transferred from the business to the owner. This transfer should be clearly recorded in the business’s financial records. Proper accounting entries are necessary to reflect the transaction accurately on the business’s books, typically recording a “loan receivable from owner” as an asset and a corresponding decrease in the business’s cash account. The owner then makes repayments to the business, adhering to the agreed-upon schedule, tracking principal and interest.

Failure to properly formalize the loan, adhere to repayment terms, or charge a reasonable interest rate can lead to significant tax consequences for both the business and the owner. The IRS may recharacterize the purported loan as a taxable dividend to the owner (not deductible by the corporation) or as taxable compensation, subject to payroll taxes. This recharacterization can result in unexpected tax liabilities for the owner and may lead to the disallowance of any associated business deductions, based on IRS guidance. Meticulous documentation and adherence to the loan terms are paramount to avoid adverse tax outcomes.