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Borrowing money from family members (or lending it to them) can be risky. Though all debt is chancy, family loans pose different risks.

While family lenders don’t have to worry about pulling (or affecting) anyone’s credit score, private loans may put a strain on otherwise strong relationships. Depending on the loan amount, there may also be tax implications to consider.

That said, there are ways to thoughtfully issue and receive family loans. Here are our best tips for lending with family and keeping your relationships intact.

What Are Family Loans?

Family loans are those given and received within a family group, rather than in a typical lending situation, such as a bank or credit union, or even a payday lender.

Someone who may not qualify for a traditional loan might be inclined to ask a family member for a loan. A family loan can be in both parties’ interests. For example, the borrower might receive a better interest rate than they would from a bank, and the lender might realize a higher interest rate than they would from a savings account.

Reasons someone might ask a family member for a loan are similar to those for considering a personal loan: They might need cash for emergency medical expenses, unexpected home repairs, or adoption or fertility treatment costs.

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

How Do Family Loans Work?

At a basic level, family loans work similarly to traditional loans: One person requests a loan, and another approves it. While that’s an oversimplification, the concept is the same. There is usually less paperwork involved in a family loan, with no application or credit check necessary, although experts recommend a formal contract detailing each party’s rights and responsibilities.

Terms for the Lender to Include in a Family Loan

•   Amount loaned

•   Interest rate, if the lender charges interest

•   Payment amount (often monthly)

•   Penalties for non-payment

Terms for the Borrower to Include in a Family Loan

•   Amortization schedule, with principal and interest amounts clearly stated

•   Ability to pay the loan off early without penalty

•   Periods of payment suspension in cases of hardship

Risks and Benefits of Family Loans

There are risks and benefits to family loans, no matter which role you’re assuming. However, while both the borrower and lender may put a strain on the family relationship involved, the lender is likely to bear the greater financial risk — after all, it can be difficult to recoup your losses when you have no official financial authority.

Risks of Family Loans

One of the biggest dangers of family loan arrangements is the potential for conflict within the relationship. People tend to have strong emotions tied to money. However, some risks lie solely with the borrower or lender.

Risks for the Borrower

•   The relationship may be endangered if the loan repayment plan falls through.

•   Although avoiding a credit check — and possible negative credit consequences — is a plus, family loans also fail to help borrowers build their credit history since they’re not reported to credit bureaus.

Risks for the Lender

•   The relationship may be in jeopardy if the loan repayment plan falls through, which puts the lender into a particularly tricky situation if they need the cash back for their own finances.

•   It’s easy for family lenders to lose their money outright if the borrower constantly defers to an IOU.

•   It can be difficult to recoup losses or enforce any substantial consequences for borrowers who go into default since family lenders don’t have any financial authority or backing.

•   If the loan is interest-free and for an amount in excess of the IRS gift tax exclusion, it may trigger the need to file a gift tax return (and potentially pay taxes on the gift).

Benefits of Family Loans

Despite the risks, family loans do have some attractive qualities.

Benefits for the Borrower

•   Family loans present a potentially low-cost alternative to traditional credit options. Family lenders usually don’t assess fees and may not charge interest.

•   Family loans can carry much easier approval standards than their traditional counterparts. At a financial institution, borrowers are subject to credit checks, employment history verification, income verification, and more. A family member is unlikely to run those checks.

•   Family loans often employ more flexible repayment standards than traditional loans do, and family lenders may be more lenient if the borrower faces extenuating circumstances that make it difficult to make payments.

•   Failure to pay private family loans promptly — or at all — won’t impact the borrower’s credit score the way such behavior would with a traditional loan.

Benefits for the Lender

•   It can be rewarding to help out a family member in need, particularly if they’re putting the money toward a major life goal such as home ownership.

•   If the lender chooses to charge interest on the loan, they can earn interest as the borrower repays the loan.

Tax Implications of Family Loans

It may be surprising to learn that loaning money to a family member could be consequential enough to land on the IRS’s radar.

Fortunately, most family loans fall outside the IRS’s purview. It’s only when they exceed IRS-defined amounts and are interest-free that lenders must report them on their tax returns.

If a family lender offers an interest-free loan to a family borrower, the IRS still treats the transaction as a loan and assumes the interest that should have been charged counts as a gift to the recipient. The government publishes minimum interest rates every month.

That’s no big deal if the loan is for, say, $300. But if the unpaid interest — or unpaid loan balance — exceeds the annual gift-giving exclusion (which is $19,000 ($38,000 for married couples) for 2026), the lender might be responsible for filing a gift tax return and potentially paying taxes on the gift.

The IRS might also count the should-be (imputed) interest toward the lender’s gross income, even if they don’t charge or receive interest. Again, this isn’t a big deal on loans of just a few hundred dollars, but a large enough loan could impact the lender’s finances.

Making a Family Loan Legitimate for Tax Purposes

The main thing that makes a family loan legitimate to the IRS is a family loan agreement that specifies repayment terms. If an agreement is not in place, the agency may treat it as a gift rather than a loan.

The federal government sets minimum interest rates (as noted above) that lenders can charge on private loans, such as family loans. If the lender charges less than the minimum interest rate, the IRS may assess taxes on any unpaid interest that is deemed payable.

Keeping records of payments made will also show the IRS that the lender was tracking the debt and that there is an expectation of repayment.

Recommended: Paying Taxes on Personal Loans

Tips to Successfully Borrow From or Lend Money to Family

If you’re considering lending money to or borrowing money from a family member, adding some structure to your loan can help minimize risks while still allowing everyone involved to reap the benefits.

Planning Your Family Loan-Out

A family loan frequently takes place in a single, impromptu transaction: The borrower asks for some money, and the lender gives it.

A better idea is to make a concrete plan together that specifies all the loan’s terms, such as repayment installments and timing. Lenders might want to consider charging interest, especially on large loans, due to the tax implications outlined above. Even a low family loan interest rate can motivate a borrower to take repayment seriously.

Recommended: What Happens If You Default on a Personal Loan?

Making a Family Loan Official

Clear communication and boundary-setting skills make pulling off a family loan a positive experience for all involved, and oftentimes, the best way to achieve those goals is to write things down.

Drafting a formal money-lending contract also makes your loan official in the eyes of the IRS, which can help prevent it from being classified as a gift for tax purposes.

Terms to incorporate in your family loan agreement include:

•   The amount loaned

•   The loan’s repayment terms, such as frequency and amount, as well as a due date for when the borrower must repay the loan in full

•   The loan’s interest rate and fees, if any (for instance, the lender may decide to charge late fees if the loan repayment terms are not honored)

•   Clauses concerning what happens if the loan is repaid early, such as a prepayment penalty, or what happens if the borrower goes into default for any reason.

Family Loans vs Gifts

If a family lender has the financial ability and willingness to make a monetary gift rather than a loan, they can do so without tax implications for amounts of up to $19,000 in 2026.

There are various reasons someone might choose to give a gift rather than make a loan, or vice versa.

Alternatives to Family Loans

If all these caveats and warnings make family loans sound like a less-than-prudent idea, consider alternatives before asking family members for a loan. Remember, if a family member asks you to borrow money, you’re allowed to say no and steer them in a different direction.

Obviously, the ideal financial strategy for making a big purchase is to save money so you don’t have to go into debt. Although this isn’t always possible or realistic, it might be worth taking a second look at your budget, working on a promotion, or starting a side hustle to generate cash.

Unsecured personal loans are available from certain banks and financial institutions, and you can use them to fund a wide variety of expenses upfront. Of course, these may come with higher interest rates and more stringent qualification requirements than family loans.

You might also consider asking a family member to cosign on a loan with you instead of loaning you the money. They would be responsible for making the loan payments if you, the primary borrower, default, but they wouldn’t have to immediately withdraw money from their own bank account to help you.

If you need to borrow money for business purposes, a small business loan may be an option. The Small Business Administration is an excellent resource for business loans. The agency works with lenders to help small business owners find funding for a wide range of amounts and terms, with competitive interest rates.

💡 Quick Tip: Generally, the larger the personal loan, the greater the lender’s risk and the higher the interest rate. As a result, one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

While borrowing or lending money to a family member can be tempting, it can have long-lasting effects on interpersonal relationships and the lender’s finances. Drafting a structured family loan agreement can help, but you may also want to explore a traditional personal loan from a bank, credit union, or online lender.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a loan from a family member called?

A loan from a family member is often called a family loan, an intra-family loan, or a friends-and-family loan.

Can family loans help your credit?

Since a family member is not likely to formally check your credit report or provide payment information to the credit bureaus, a family loan probably won’t help (or hurt) your credit.

Are family loans considered debt?

Yes, a loan from a family member is considered debt, but it’s unlikely to be reflected on your credit report. For tax purposes, a family loan is treated as debt if it meets certain criteria.

Photo credit: iStock/Ridofranz

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SOPL-Q126-028

Being self-employed offers many perks, including freedom and flexibility. What it doesn’t offer is an employer-sponsored retirement plan. But when you don’t have access to a 401(k) at work, opening a solo 401(k) can make it easier to stay on track with retirement planning.

Before you establish a solo 401(k) for yourself, it’s important to understand how these plans work and the pros and cons involved.

What Is a Solo 401(k)?

A solo 401(k) is a type of 401(k) that’s designed specifically with self-employed individuals in mind. This retirement savings option follows many of the same rules as workplace 401(k) plans in terms of annual contribution limits, tax treatment, and withdrawals. But it’s tailored to individuals who run a business solo or only employ their spouses.

It’s one of several self-employed retirement options you might consider when planning a long-term financial strategy.

Definition and Overview

A solo 401(k) is a tax-advantaged retirement account that’s for self-employed individuals and business owners who have zero employees, or no employees other than their spouse. This type of 401(k) plan is also known by a few other names:

•   Solo-k

•   Uni-k

•   One-participant plan

Traditional solo 401(k) contributions are made using pre-tax dollars. However, it’s possible to open a Roth solo 401(k) instead. In the case of a Roth solo 401(k), you’d make contributions using after-tax dollars and be able to withdraw the money tax-free in retirement.

A self-employed 401(k) plan works much the same as a regular 401(k). For instance, you may be able to take loans from your savings if needed. Catch-up contributions are also allowed. The biggest difference is that there is no matching contribution from an outside employer.

You can start investing in a solo 401(k) for yourself through an online brokerage. There’s some paperwork you’ll need to fill out to get the process started, but once your account is open you can make contributions year-round.

At the end of the year, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if the account has $250,000 or more in assets.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Contribution Limits in Solo 401(k) Plans

Much like workplace 401(k)s, there are annual contribution limits that apply to solo 401(k) plans.

The IRS caps total contributions to a solo 401(k) account at $70,000 for 2025 and $72,000 for 2026 That doesn’t include catch-up contributions for those age 50 and over.

As both the employee and employer of your own business, you can contribute both elective salary deferrals and employer nonelective contributions (you are both the employer and the employee in this scenario). Each has different contribution caps.

Annual Contribution Limits

As an employee, you can contribute up to 100% of your earned income up to the annual contribution limit: $23,500 in 2025 and $24,500 in 2026, plus an additional $7,500 for those age 50+ in elective salary deferrals in 2025 and $8,000 in 2026. In 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500 and $8,000 respectively.

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their catch-up contributions into a Roth solo 401(k) account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

In addition, you can make employer nonelective contributions. These come directly from the “employer” (aka you) and are not deducted from the employee’s (your) salary. As an employer, you can contribute up to 25% of your self-employment income (business income – ½ self-employment tax and elective salary deferrals), in pre-tax dollars.

Setting Up a Solo 401(k) Plan

If you’re interested in setting up a solo 401(k) for yourself, you can do so through an online brokerage. Here’s a step-by-step guide for how to open a solo 401(k).

Steps to Establish Your Plan

1. Choose a Plan Administrator

A plan administrator is the person responsible for managing your solo 401(k). It’s their job to make sure the plan is meeting reporting and other requirements established by the IRS. If you’re self-employed, you can act as your own plan administrator or you could choose your accountant instead.

2. Choose a Brokerage

Once you know who’s going to manage the plan, the next step is deciding where to open it. A number of brokerages offer solo 401(k) plans so you may want to spend some time comparing things like:

•   Account setup process

•   Investment options

•   Fees

You may be able to start the solo 401(k) account setup process online, though some brokerages require you to call and speak to a representative first. And you may need to finalize your account opening by mailing or faxing in any supporting documents the brokerage needs to complete the application.

3. Fill Out a Solo 401(k) Application

Before you can start a 401(k) account for yourself, you’ll need to give your brokerage some information about your business. A typical solo 401(k) application may ask for your:

•   First and last name

•   Employer Identification Number (EIN)

•   Plan administrator’s name and contact information

•   Social Security number

•   Mailing address

•   Citizenship status

•   Income information

You’ll also need to disclose any professional associations or affiliations that might result in a conflict of interest with the brokerage. In completing the application, you’ll be asked to name one or more beneficiaries. You may also be asked to provide bank account information that will be used to make your initial contribution to the plan.

4. Choose Your Investments

Once you’ve returned your solo 401(k) account application and it’s been approved, you can choose your investments. The type of investments offered can depend on the brokerage and the plan. But typically, you may be able to choose from:

•   Target-date funds

•   Index funds

•   Actively managed funds

•   Exchange-traded funds (ETFs)

Whether you have access to individual stocks, bonds, CDs, or alternative investments such as commodities can depend on the platform that’s offering the plan.

5. Decide How Much to Contribute

You may choose to schedule automatic investments or make them manually according to a schedule that works for you.

Choosing Between Traditional and Roth Solo 401(k)s

You can opt for a traditional solo 401(k), which is made with pre-tax dollars, or a Roth solo 401(k), which is made with after-tax dollars. Which plan is better for you may depend on what you expect your income to be in retirement.

If you believe your income will be higher in retirement than it is now, in general, a Roth could be a better choice since you can take the distributions tax-free at that time. But if you think your income may be less in retirement than it is now, you might be better off with a traditional solo 401(k), which allows you to take the tax deduction now and have your distributions taxed in retirement.

Advantages and Disadvantages of Solo 401(k) Plans

When considering retirement account options, it can be helpful to look at the pros and cons to determine what works best for your personal situation.

Benefits of Having a Solo 401(k)

There are different reasons why opening a 401(k) for self employed individuals could make sense.

•   Bigger contributions. Compared to other types of self-employed retirement plans, such as a SEP IRA or SIMPLE IRA, solo 401(k) contribution limits tend to be more generous. Neither a SEP IRA or SIMPLE IRA, for instance, allows for catch-up contributions.

•   Roth contributions. You also have the option to open a Roth solo 401(k). If you anticipate being in a higher tax bracket when you retire, you may prefer being able to withdraw contributions tax-free with a Roth.

•   Flexible withdrawal rules. A solo 401(k) can also offer more flexibility with regard to early withdrawals than a SEP IRA, SIMPLE IRA, traditional IRA, or Roth IRA. If your solo 401(k) plan allows it, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. An IRA-based plan wouldn’t allow for loans.

Considerations and Potential Drawbacks

There are also a few potential downsides of investing in a solo 401(k).

•   Eligibility restrictions. If you run a small business and you have at least one employee other than a spouse, you won’t be able to open a solo 401(k) at all.

•   Complicated reporting. Calculating contributions and filing can be more complicated with a solo 401(k) vs. a SEP IRA or SIMPLE IRA. If your plan has more than $250,000 in assets you’ll need to file Form 5500-EZ with the IRS each year.

•   Administrative costs. Depending on where you open a solo 401(k) plan, the cost of maintaining it year to year may be higher compared to other self employed retirement plans. And an early 401(k) withdrawal can trigger taxes and penalties.

It’s important to consider the range of investment options offered through a solo 401(k). What you can invest in at one brokerage may be very different from another. The individual cost of those investments can also vary if some mutual funds or exchange-traded funds offered come with higher expense ratios than others.


💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Withdrawals and Loan Provisions

There are certain requirements for withdrawals and/or loans from a solo 401(k).

Rules for Withdrawing Funds

You can make withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability, but you may owe a 10% penalty as well as income taxes on the withdrawal.

Loan Options and Conditions

Some solo 401(k) plans may be set up to allow loans. If yours does, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. Just be sure to find out the loan terms and conditions, which can vary by plan.

Testing and Compliance for Solo 401(k)s

Unlike workplace 401(k)s, solo 401(k)s have no testing compliance requirements involved.

Alternatives to Solo 401(k) Plans

Instead of a solo 401(k), self employed individuals can consider another type of retirement account. Here’s how different options stack up.

Comparing a Solo 401(k) to a SEP IRA and Other Retirement Options

A SEP IRA is designed for small businesses. However, unlike a solo 401(k), a SEP IRA allows no catch-up contributions and there is no Roth version of the plan.

A SIMPLE IRA is for businesses with no more than 100 employees. It has much lower contribution limits than a solo 401(k) and once again, there is no Roth option.

Pros and Cons of a Solo 401(k)

A solo 401(k) has advantages and disadvantages. Here’s a side-by-side comparison of the benefits and drawbacks.

The Takeaway

A solo 401(k) can be a worthwhile investment vehicle for self-employed people who want to save for retirement. It has more generous contribution limits than some other retirement options. In addition, there is a Roth version of the plan, and a solo 401(k) plan may also offer flexibility in terms of early withdrawals. For individuals who are self-employed, opening a solo 401(k) is one potential way to start saving for their golden years.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Can I contribute 100% of my salary to a solo 401(k)?

As an employee, you can contribute up to 100% of your earned income to a solo 401(k) up to the annual contribution limit, which is $23,500 in 2025, and $24,500 in 2026 plus, for those 50 and up, an additional $7,500 in 2025 and $8,000 in 2026 in elective salary deferrals. For both 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500 and $8,000 respectively. Be aware that as of January 1, 2026, however, individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their catch-up contributions into a Roth solo 401(k) account.

Is a solo 401(k) taxable income?

You will pay taxes with a solo 401(k), but the type of plan you open determines when you’ll pay those taxes. If you have a traditional 401(k), your contributions are tax-deferred, and they reduce your taxable income for the year in which you make them. However, you will pay taxes on distributions when you take them in retirement. If you have a Roth 401(k), you pay taxes on your contributions when you make them, but your distributions in retirement are tax-free.

What is the average return on a solo 401(k)?

The return on a solo 401(k) depends on the investments in your portfolio. However, in general, a solo 401(k) invested in a mix of bonds, stocks, and cash assets can have an average rate of return ranging between 3% and 8%. But again, it depends on what your investments are, and how much you allocate to those different assets. You may want to compare your plan’s performance to plans with similar funds to get a general sense of what the average return might be.

Who qualifies for a solo 401(k)?

To be eligible for a solo 401(k), you must be self-employed or a small business owner with no employees other than a spouse. To open a solo 401(k) you will need an Employee Identification Number (EIN), which is available from the IRS.

Photo credit: iStock/visualspace

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.