Separate Participant/Holding Accounts for the Solo 401k Plan

A solo 401k plan falls under the defined contribution plan umbrella not the defined benefit plan umbrella. As a result, each solo 401k participant’s funds must be separately accounted for. Solo 401k contribution types (i.e., pretax, roth and voluntary after-tax) require separate tracking as well.

The need for separately tracking the participants’ funds and sources under the plan is satisfied through the use of multiple bank or brokerage accounts.

One Participant in the Solo 401k Plan

For example, if the solo 401k plan only has one participant, 1 (one) to 3 (three) separate bank or brokerage accounts may be needed depending on whether or not the participant chooses to make all three contribution types (pretax, roth and voluntary after-tax) or chooses to convert pretax or voluntary after-tax funds to the Roth solo 401k bucket.

For example, if Sarah is the sole participant in her solo 401k plan (the ABC Trust) and she chooses to make all three contribution types, she will need three separate bank or brokerage accounts and they would be titled as follows:

XYZ Trust (Pretax), Sarah Byrd, Trustee
XYZ Trust (ROTH), Sarah Byrd, Trustee
XYZ Trust (After-Tax), Sarah Byrd, Trustee

Two Participants in the Solo 401k Plan

If the solo 401k has 2 (two) participants, a total of 6 (six) participant bank or brokerage accounts may be needed if both participants choose to make all three contribution types (pretax, roth and voluntary after-tax).

For example, if Sarah and her spouse Jack both participate in the solo 41k plan and both choose to make all three contribution types, a total of 6 (six) separate bank or brokerage accounts will need to be opened up and titled as follows:

3 Accounts for Jane

XYZ Trust (Pretax), Jane Do, Trustee
XYZ Trust (Roth), Jane Do, Trustee
XYZ Trust (After-Tax), Jane Do, Trustee

3 Accounts for John

XYZ Trust (Pretax), John Do, Trustee
XYZ Trust (Roth), John Do, Trustee
XYZ Trust (After-Tax), John Do, Trustee

The Same Solo 401k Employer Identification Number (EIN)

The same EIN applies when opening separate bank and/or brokerage accounts for each source of funds (e.g., pretax, roth and voluntary after-tax) since they are part of the same solo 401k plan. After all, the purpose of separate bank or brokerage accounts is to meet the IRS requirement of separately accounting for each source of funds under the solo 401k plan.

Contribute from Personal vs Business Bank Account QUESTION:

Regarding funding these accounts, is it acceptable to fund them from our personal accounts, or does the payment need to come from the business?

It is acceptable to make contributions from your personal accounts.

It is also acceptable to make contributions from business account.

What is important is you each have the self employment earned income to justify the contributions being made.

Separate Bank & Brokerage Accounts QUESTION:

In addition to using brokerage accounts, are there any limitations with holding my Solo 401K funds in checking accounts with a local bank?

Yes, the solo 401k may have multiple holding accounts (e.g., a bank account & a brokerage account) for the same source of funds (e.g., pretax funds). This is popular for solo 401k account holders seeking to invest in cryptocurrency, for example.

When opening the bank account for the applicable solo 401k participant, make sure it is opened in the name of the solo 401k plan using the Plan’s EIN as described above. Click here to view a solo 401k bank account guide.