Can a Solo 401(k) Have a Credit Card? (Things to Be Aware Of)

A solo 401(k) plan gives the owner access to funds that can be a practical asset for investing in business and other expensive ventures in much the same way that a credit card can. But many investors are curious whether a solo 401(k) plan can be used in conjunction with a credit card. 

Investors should be aware that a solo 401(k) plan cannot have a credit card issued to it for the purpose of withdrawing money on credit. Money can be withdrawn from the 401(k) and placed on a prepaid credit card, however. 

Taking loans against a solo 401(k) can give investors and entrepreneurs a leg-up on investing when performed wisely. Keep reading to learn more about credit cards and whether you can use one with a solo 401(k). 

Can a Solo 401(k) Have a Credit Card?

The first thing that you should know about opening a solo 401(k) account is that you can't attach a credit card to the solo (401)k plan.

The reason for this is that the bank considers the owner of the solo 401(k) account a disqualified person to borrow against on the plan, and a credit card loan against a 401(k) by the account holder is considered a prohibited transaction.

A 401(k) account is not a person with a credit history that can be borrowed against. What Is a Prohibited Transaction?

In a solo 401(k), a prohibited transaction is any transaction by a disqualified person, including the account holder of the 401(k) that uses the retirement funds for their own benefit.

If a 401(k) plan engages in a prohibited transaction it will incur a 15% penalty on the amount associated with the prohibited transaction and the transaction must be undone to avoid the penalty from increasing to 10%..

Here are some other things that are considered prohibited transactions on a solo (401)k (Source: IRS): 

• Exchange, selling, or leasing of property

• Money lending and private credit extension

• Furnishing services, facilities, or goods

Included in prohibited transactions is attaching a credit card to the solo 401(k), as this falls into the category of money lending and private credit extension. 

Why Is the 401(k) Account Holder a Disqualified Person? 

With a solo 401(k), a disqualified person is considered any person who would personally benefit from the removal of the funds in the 401(k) if the funds are withdrawn before retirement. 

This doesn't mean that funds can't be withdrawn for a personal loan, but it does mean that the funds can't be withdrawn without a tax penalty. 

Here are some other examples of disqualified persons on a 401(k) that cannot get a credit line associated with it (Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions):

• Fiduciaries (people who have a direct financial relationship to the investment portfolio)

• Direct family members or lineal descendants

• Spouses

• Service providers

• Employers or employees that are covered by the 401(k)

Since a solo 401(k) has one or more owners and no employees, the employer and holder of the solo 401(k) plan is considered a disqualified person. 

Can You Still Withdraw From a Solo 401(k) Without a Credit Card?

Even though you can't attach a credit line to a 401(k) account, that doesn't mean you can't invest in business start-ups or other activities that require capital using your 401(k) plan.

Owners of a solo 401(k) account can have a limit on the number of loans a participant can take from their account.   The maximum loan amount is the lesser of 50% of the participant’s vested balance not to exceed $50,000. 

A solo 401(k) card can't have a credit card attached to it, but it can still be used to improve your credit. If you have outstanding credit card debt, transferring this debt to a solo 401(k) loan will substantially reduce your credit interest rates and may improve your credit-to-debt ratio. 

Does It Cost Money to Get a Loan Against a Solo 401(k) Plan?

Unlike credit cards, which can charge significant service fees and high interest rates, getting a loan against the money in a solo 401(k) plan has no cost other than nominal fees that may be required by a plan’s recordkeeper.  Remember however, that you must pay the loan back at least quarterly within a 5 year period or else the outstanding balance becomes fully taxable and subject to a potential 10% early distribution penalty. 

Using a Credit Card with a Solo 401(k) Plan

Even though you can't attach a private line of credit on a credit card to your 401(k) account, there are workarounds that allow you to use a credit card in conjunction with a solo 401(k) account.

These are the two main methods for using a solo 401(k) and a credit card together: 

• Transfer to prepaid credit card: One way to set up a line of credit with a solo 401(k) loan is to get the loan money and transfer it to a prepaid VISA or other credit card. Along with the convenience of access, a prepaid card doesn't accrue interest or affect your credit score. (Source: Chase Bank)

• Pay off existing credit card debt: A solo 401(k) loan can be used to turn around and pay off an existing line of credit. This can help the solo 401(k) account holder reduce their credit interest rates. 

If you want to access your solo 401(k) funds on a credit card while keeping them separate from your other finances, a prepaid credit card can be the way to go.

This can help you keep track of your spending on the solo 401(k) loan and any scheduled plans to pay that money back into the fund. 

Using Credit Cards with a Solo 401(k) Can Be a Practical Financial Strategy

While it might be illegal for solo 401(k) holders to directly attach a credit line to their solo 401(k), there are ways to work around this and still get the most out of a solo 401(k) and any existing lines of credit you may have.

We know keeping records on long-term investments like a solo 401(k) can be intimidating, so having a team of professionals on your side can be helpful.

If you have any questions on how to self-direct your solo 401(k) plan, check in with our experts at SEPira(k) to get a firm handle on your assets and your future.