If you’re eligible for a solo 401k, it can be a huge tax advantage to set up an account. A solo 401k has higher contribution limits than most other retirement plans, a Roth option, tax-free compounding, and almost no restrictions on what asset classes you can invest in.
If you’re interested in setting up a solo 401k plan and making contributions for the 2023 tax year, remember that the deadline to set up an account and file your election is December 31st, 2023.
You only need to set up your account and file an election by this date. You have until the federal tax deadline (April 15, 2024) to actually deposit your contribution to your account if your business is registered as a C corporation, sole proprietorship, or LLC taxed as a sole proprietorship. S corporations, partnerships, and multi-member LLCs must make their contribution one month earlier, by March 15, 2024. Learn more about important deadlines and limits here.
This guide will walk you through the process of setting up a solo 401k plan in 2023, step-by-step.
The Carry Solo 401k comes with full plan administration, integrated investment platform, checkbook control, and no AUM fees. Learn more about it here.
How to set up a solo 401k
- Choose a plan provider
- Get an Employer Identification Number (EIN)
- Fill out an application and plan adoption agreement
- Get an EIN for your solo 401k trust
- Open bank accounts for your solo 401k trust
- Fund your solo 401k
- Start investing
Let’s dive into each step below.
Step 1: Choose a plan provider
The most important features that you should look for in a solo 401k plan are:
- Roth option: The Roth option is one of the biggest tax advantages that come with a solo 401k plan. You contribute with post-tax dollars, but you pay nothing when you withdraw from your account in retirement. Most prototype plans from institutional brokerages do not offer a Roth option.
- Rollovers: If you have another retirement account, you’re allowed to rollover up to the entire amount into your solo 401k. It’s the fastest, easiest way to fund a solo 401k. The best part is, it doesn’t affect your yearly contribution limits.
- Investment platform: This is not a very common feature, but some plan providers, like Carry, have investment platforms built directly into their backend. It allows you to skip a lot of the other steps in opening a solo 401k such as opening third party bank and brokerage accounts for your solo 401k trust.
- Administration help: Setting up your account, keeping you in compliance each year, and submitting required tax filings to the IRS. These are just some of the administration duties that a plan provider can help you with. Not every solo 401k plan provider offers administration assistance, but it can be a huge advantage and timesaver if they do.
The best solo 401k plan providers will guide you through the rest of the next steps, so you can rely on them to help you. If your plan provider doesn’t offer administration assistance, let’s move onto step 2.
Step 2: Get an Employer Identification Number (EIN)
An Employer Identification Number is a unique nine-digit number that the IRS uses to identify any business or trust.
There are two different EINs that you’ll need for opening a solo 401k.
- First, you need an EIN for your business in order to apply for a solo 401k.
- Once you open a solo 401k, it will also apply for its own EIN.
In other words, you need one EIN for your business in order to apply for a solo 401k. And you need to obtain an additional EIN for your solo 401k trust once it’s established. Any investments made in your solo 401k belong to your solo 401k trust. They do not belong to you or your business. Therefore, the IRS needs to be able to identify your solo 401k trust separate from you or your business.
How to get an EIN for your business
Most people already will have an EIN registered for their business. If you don’t already have one, you can go to the IRS website and apply. It’s free, only takes a few minutes to fill out the application, and you’ll usually be able to get one instantly after you submit it.
Step 3: Fill out an application and plan adoption agreement
There’s a fair bit of paperwork that needs to get done in order to set up a solo 401k account. The application for a solo 401k is not just a single application form, but consists of around a dozen different documents. While they’re all mandatory, the two most important forms to fill out are the plan adoption agreement and the trust agreement.
With most plan providers, the application process typically requires reading through and signing dozens of pages of documents for multiple different forms. Some providers may even make you print out and mail in your application. In comparison, with the Carry Solo 401k, you can complete everything online in under 10 minutes.
After you submit the application and you’re approved for your solo 401k account, you can move on to step 4.
Step 4: Get an EIN for your solo 401k trust
Remember this part from step 2?
Now that you’ve been approved for your solo 401k, it’s time to register a separate EIN for the trust. The process is the same as when you applied the first time for your business. The only difference is that you’ll choose the applicant type as your retirement account trust, rather than a business. This part is pretty simple since we already through it in step 2. If you use the Carry Solo 401k, this part is also taken care of for you.
Step 5: Open bank accounts for your solo 401k trust
Now that your solo 401k trust has its own EIN, it’s able to open its own bank and brokerage accounts. Your solo 401k trust is a separate entity from you and your business. You cannot intermingle your personal or business accounts with your solo 401k. That would be considered a prohibited transaction and penalties could be extremely severe.
Create separate accounts for your traditional solo 401k and Roth solo 401k
If your solo 401k plan has a traditional option and a Roth option, you’ll have to open bank and brokerage accounts for each of them to keep them separate from each other. Otherwise, you wouldn’t be able to distinguish which funds/assets belong to your Roth account and which ones belong to your traditional account.
As you can see, there’s a little more to manage with a solo 401k than something like a Roth IRA. To solve this administration/maintenance nightmare, Carry comes with an integrated investment platform directly built in that you can choose to use instead of having to go and find a third party brokerage to open your solo 401k accounts.
Step 6: Fund your solo 401k
Once you open your bank and brokerage accounts, it’s time to fund it.
You can fund a solo 401k in two ways:
- Make contributions up to the yearly contribution limit.
- Rollover funds from another retirement account
A rollover is the much faster and easier option to fund a solo 401k. Not only can you rollover as much as you want from another account, it doesn’t affect your yearly contribution limit.
You can rollover funds and/or assets from any retirement account including:
- Company 401k plan
- Pension plan
- Traditional IRA
- SEP IRA
- SIMPLE IRA
The only retirement account you cannot rollover to a solo 401k is a Roth IRA.
Step 7: Start investing
Finally, you’re now ready to start making investments through your solo 401k. With a solo 401k, you can invest in any asset class you want, minus a few exceptions. The IRS does not specify which investments are allowed, but they do have a short list of prohibited investments.
Prohibited investments include:
- S corporation stock
- Life insurance investments
As long as what you invest in does not fall into these categories, you should be able to invest in it through your solo 401k. If you have any questions or concerns, you can always reach out to your plan provider to double check.
Here are some common investments made through a solo 401k:
- Individual stocks of companies
- Mutual funds
- Certificates of deposit
- Foreign currencies
- Private equity
- Crowd funding deals
- Precious metals
- Tax liens and deeds
- Residential and commercial real estate
- REITS, flipping houses, foreclosures
Opening a solo 401k is straightforward, apart from the paperwork and administration. But if you work with a full-service plan provider, they’ll take care of a lot of the setup for you.
Remember that if you wish to make contributions for 2023, the deadline to open and set up an account is December 31, 2023. You don’t have to send any money by this day, but your account must be set up and you must file your elections before the year ends.