How the Prime Interest Rate Impacts a Solo 401(k) Loan

For self-employed business owners, consultants, real estate investors, and side-gig entrepreneurs, the Solo 401(k) remains one of the most powerful retirement and tax planning tools available. It offers high contribution limits, Roth options, checkbook control, and, when structured properly, a loan feature that allows you to borrow from your own retirement funds without triggering taxes or penalties.

One of the most important components of the Solo 401(k) loan feature is the interest rate, which is directly tied to the Prime Rate. The Prime Rate changes over time and, as of December 10, 2025, stands at 6.75%. Because Solo 401(k) loan rates must be reasonable and consistent with commercial lending standards, most plan providers, including IRA Financial, use the Prime Rate as the benchmark.

Understanding how this rate works can help self-employed investors borrow strategically and manage retirement liquidity more effectively.

What Is a Solo 401(k)?

A Solo 401(k), also known as an individual 401(k), is a retirement plan designed for business owners with no full-time employees other than themselves and, in some cases, a spouse. It offers several key advantages:

• Very high contribution limits compared to IRAs
• Both Roth and traditional contribution options
• The ability to invest in alternative assets such as real estate, private equity, private lending, cryptocurrency, precious metals, and more through a self-directed structure
• Checkbook control, which allows faster and more direct investing
• An exemption from UBTI on leveraged real estate
• A loan feature that allows tax-free access to retirement funds

This combination makes the Solo 401(k) one of the most comprehensive retirement plans available to entrepreneurs.

How the Solo 401(k) Loan Feature Works

The IRS allows Solo 401(k) participants to borrow from their plans as long as specific rules are followed:

• You may borrow up to 50% of your account balance, capped at $50,000
• The loan must generally be repaid within five years, unless the loan is used to purchase a primary residence
• Payments must include both principal and interest and be made at least quarterly
• The interest rate must be reasonable and consistent with market lending rates

The industry standard for what qualifies as a reasonable interest rate, and the benchmark IRS auditors expect to see, is the Prime Rate. That is why the Prime Rate plays such a critical role in how Solo 401(k) loans are structured.

Why the Prime Interest Rate Matters

The Prime Rate is the interest rate banks charge their most creditworthy borrowers. It serves as a baseline for many types of commercial and consumer loans and is widely viewed as a fair reflection of market conditions.

As of December 10, 2025, the Prime Rate is 6.75%.

Because most Solo 401(k) plans use the Prime Rate to set their loan interest rate, changes to this rate directly affect:

• Your Solo 401(k) loan interest rate
• Your monthly payment amount
• The total interest repaid over the life of the loan

Unlike a traditional bank loan, all interest paid on a Solo 401(k) loan goes back into your own retirement account. Even in a higher interest rate environment, you are paying interest to yourself rather than to a lender.

Example: Solo 401(k) Loan at the Current Prime Rate

To see how this works in practice, consider a standard Solo 401(k) loan using the current Prime Rate of 6.75%:

• Loan amount: $50,000
• Loan term: 5 years
• Interest rate: 6.75%
• Approximate monthly payment: $980 to $985
• Total interest paid over 5 years: approximately $9,000

All of the interest paid flows directly back into your Solo 401(k), helping replenish the account over time.

If the Prime Rate decreases, monthly payments and total interest costs decline. If the Prime Rate increases, both rise. This is why it is important for Solo 401(k) participants to monitor interest rate movements before taking out a loan.

Why Self-Directed Investors Use This Feature

A Solo 401(k) loan can be especially valuable for entrepreneurs and investors who need flexibility. Common uses include:

• Funding a new business or startup
• Covering unexpected expenses
• Accessing liquidity without triggering taxes or early withdrawal penalties
• Managing cash flow during slower business periods
• Avoiding high-interest credit cards or personal loans

For real estate investors, property flippers, and alternative asset investors, the ability to borrow from retirement funds while paying interest back into the plan is a significant advantage.

Why IRA Financial Is a Leader in the Solo 401(k) Industry

IRA Financial is one of the most trusted providers of Solo 401(k) plans, offering flexibility, transparency, and deep expertise. Clients choose IRA Financial because:

• Plans are fully IRS-compliant and properly structured
• Investors receive true checkbook control
• Both traditional and alternative investments are supported
• Loan documents are clear, compliant, and easy to administer
• There are no hidden transaction fees
• Tens of thousands of Solo 401(k) clients are served nationwide
• More than $5 billion in retirement assets are administered

Entrepreneurs work with IRA Financial because they want a powerful, flexible, and investment-friendly Solo 401(k) plan designed to support long-term growth.