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Harvard Law Attorney George Blower explains why the top of Solo 401k investments is one of the top considerations in deciding whether to open a bank or brokerage account for your Solo 401k.
Bank vs Brokerage Account for Solo 401k: Key Considerations
If you are self-employed and have a solo 401k retirement plan, you have options when it comes to setting up a bank or brokerage account to hold your plan assets.
Brokerage Account Benefits
A solo 401k brokerage account offers some advantages:
- Allows investing in stocks, mutual funds, ETFs – things not possible with just a bank account
- Typically no monthly fees, just transaction fees
- Several come with a free checkbook (e.g. Fidelity and Schwab)
- Easy to set up with major firms like Fidelity, Schwab, E*Trade just to name a few
Bank Account Benefits
Some benefits of using a bank account for your solo 401k include:
- In addition to checkbook access, access to:
- Cashier’s checks
- ACH funds in and out of the account
- Debit Cards
- Based on client feedback, these features are useful for real estate and other alternative investments
- We have helped clients open accounts at 100s of national/local banks and credit unions
Other Key Considerations
- The solo 401k plan provider, not the bank or brokerage, handles ongoing solo 401k plan compliance support like Solo 401k loan document preparation, plan reporting (1099-R, 5500-EZ), and mandatory plan updates and amendments.
- Regardless of account type, proper solo 401k plan titling and tax ID (401k EIN) is critical.
- Can open both brokerage and bank accounts to have full flexibility.
- Some firms like Vanguard don’t accommodate third-party solo 401k plans.
- Local banks/credit unions often easy to work with for solo 401k bank accounts.
Frequently Asked Questions About Solo 401k Bank vs Brokerage Accounts
What is the difference between a bank account and a brokerage account for a solo 401k?
The main difference is that a brokerage account allows you to invest in stocks, mutual funds, ETFs, and other securities, while a bank account does not. However, a bank account provides other services like cashier’s checks, debit cards, and easy ACH transfers that can be useful for Solo 401k alternative investments.
Can I invest in individual stocks through a solo 401k bank account?
No, you cannot buy individual stocks or mutual funds directly through a solo 401k bank account. To invest in securities like stocks and mutual funds, a brokerage account would need to opened for the Solo 401k with a firm like Fidelity, Schwab, or E*Trade. Please note that we prepare the paperwork to open accounts at the bank or brokerage of choice as part of our services.
What are the benefits of using a bank account for a solo 401k?
Bank accounts provide access to services like cashier’s checks, debit cards, and easy ACH transfers. This can be helpful if you want to invest solo 401k funds in alternative assets like real estate, private companies, or tax liens.
What brokerages accommodate third-party solo 401k plans?
Fidelity and Schwab are two popular options that make it easy to open brokerage accounts for third-party solo 401k plans. We also help our clients open brokerage accounts at many other firms such as E*Trade, Merrill, and Interactive Brokers just to name a few.
Is it possible to have both a bank account and a brokerage account for my solo 401k?
Yes, you can open both a solo 401k bank account and a solo 401k brokerage account to have the most flexibility. The accounts just need to be properly titled and use the tax ID of the solo 401k plan. Please note that we obtain an employer identification number for the Solo 401k as part of the onboarding process.
What solo 401k plan administration duties do the bank or brokerage handle vs. the plan provider?
Neither the bank nor brokerage handle plan administration like loans, reporting, and document updates. We help our clients open accounts at the bank or brokerage of choice and then handle the ongoing solo 401k compliance support, not the financial institution.
How many brokerage accounts do I need for a solo 401k plan?
It depends. If both spouses participate, each spouse needs a separate account opened under the name and EIN of the Solo 401k for the benefit of each spouse. In addition, different accounts are also needed for different types of funds (i.e. Pre-tax, Roth, and Voluntary After-tax also need to be held in separate accounts).
