The Differences and Similarities Between Bank Account and Brokerage Account for Self-Directed Solo 401k

While a bank or brokerage account is required to hold the solo 401(k) liquid funds which can then be self-direct in investments such as real estate, precious metals, tax liens, and promissory notes, to name a few, both types of accounts have their differences and similarities which are covered below.

Checkbook Self-Directed Solo 401k Plan

The Solo 401k Bank and Brokerage Account Similarities:

  • Both come with a checkbook for investing in alternative investments such as real estate, promissory notes, metals, private companies and tax liens, to name a few.
  • Since both come with a free checkbook, a check can be written for processing a solo 401k participant loan.
  • Both allow for outgoing wires for investing in alternative investments as well as processing 401(k) loan (borrowing form the plan).
  • Neither the bank nor the brokerage firm serves as the solo 401(k) plan provider. Instead, My Solo 401k Financial performs this important role.
  • Neither the bank nor the brokerage firm prepare the solo 401k loan documents. Instead, My Solo 401k prepares the loan documents.
  • Neither the bank nor the brokerage firm holds the solo 401k participant loan paperwork. Instead, the solo 401k owner holds the paperwork.
  • Neither the bank nor the brokerage firm hold the investment paperwork in connection with each solo 401k alternative investment (e.g., real estate, notes and tax liens). Instead, the solo 401k owners safe-keeps the investment paperwork.
  • Neither the bank nor the brokerage firm server as trustee of the solo 401k. This role is performed by the solo 401k owner.
  • Neither the bank nor the brokerage firm perform solo 401k reporting, such as the issuance of Form 1099R and Form 5500-EZ. This is performed by My Solo 401k Financial with the cooperation of the solo 401k trustee.
  • Neither the bank nor  the brokerage firm process the solo 401k plan document updates. This is provided by My Solo 401k Financial as the solo 401k provider.

The Solo 401k Bank and Brokerage Account Differences:

  • The brokerage account allows for investing in stocks and mutual funds in addition to real estate, notes, metals, and tax liens, for example.
  • While the bank account allows for investing in real estate, notes, metals, and tax liens, for example, it does not allow for investing in stocks and mutual funds.
  • The brokerage account is generally less expensive than the bank account because the brokerage firm only charges out-going wire fees and stock trading fees. On the other hand, the bank generally charger a monthly bank account fee.
  • The bank account comes with a debit card if the solo 401k owner chooses to order one. The brokerage account does not come with a debit card
  • IMPORTANT COMPLIANCE NOTE 1: A solo 401k is not allowed to obtain a credit card.
  • The bank account allows for cashier checks which is important when investing in tax liens and purchasing real estate at auction. The brokerage firm will not issue cashier checks.

In sum, a solo 401k from a solo 401k plan document provider such as My Solo 401k Financial allows for the use of a bank and/or brokerage account for processing solo 401k participant loans as well as investing in equities and alternative investments. However, as explained above, both are very similar but different in nature.

Retail Bank Account QUESTION:

Having a brokerage account allows for investing in traditional investments (e.g. mutual funds, stocks, etc.) that you can't invest in via a bank. While the Fidelity brokerage account also comes with a checkbook and you can process investment by wire, having a bank account allows for access to cashier checks & a debit card.  You can also have both a bank and a brokerage account.

Vanguard Brokerage Account QUESTION:

While Vanguard used to be a viable option in the past for these types of accounts, more recently they require that the accounts be set up as pooled accounts which will not be compatible if the solo 401(k) plan will have multiple participants and/or multiple types of funds (e.g. pretax, Roth, after-tax). Therefore, this will not be a good set up for what you want to achieve. Alternative options are Fidelity, Schwab, etc. where we would prepare all of the paperwork to open up brokerage accounts which are free to set up with no maintenance fee including a free checkbook.

Number of Brokerage Accounts QUESTION:

It depends if both trustees (e.g., husband ans spouse) participate in the plan and on the contributions types that will be made (e.g., pretax, Roth and voluntary after-tax) to the solo 401k plan.

If both trustees participate in the plan:  (1) There will be at least 2 brokerage accounts for each of you (one in the name of the 401k for the benefit of John and a second in the name of the 401k for the benefit of Sally).  In addition, if you wish to have Roth funds (and/or Voluntary After Tax funds), additional brokerage accounts will be needed (potentially 6 if there are pre-tax, Roth and Voluntary After-Tax for each of you).  (2) We would prepare the brokerage forms.  Note that Fidelity and Schwab are best in terms of ease of setup, etc. based on customer feedback.

Using Merrill Lynch Brokerage Accounts QUESTIONS:

Correct - no restrictions under rules.  It is just that while some brokerage firms (e.g. Fidelity and Schwab) make it easy, other firms have made a business decision not to support (e.g. Vanguard).  Based on experience, Merrill has been hit or miss.  The key is that the account is opened under the name of the solo 401k plan and the tax ID/EIN for the 401k (which we obtain as part of our services).  Please note that the Solo 401k is a revocable trust but not a living trust and the form provided by Merrill ("Merrill Edge Self-Directed Trust Cash Management Account -CMA Account") refers to a living trust.

Letter from Chase Bank QUESTION:

The Chase letter should have box where you can check a box to confirm the solo 401k plan is not subject to ERISA. The answer is no as solo 401k plans are for owner-only employees; therefore, solo 401k plans are not subject to Title I of ERISA.

I want to rollover Solo 401k from one bank account to one that pays higher interest payments at BofA. The account will be under there umbrella, however, it will be a Merrill Lynch money market account. One, how do I do this, two, what would be the downside?

Whether you open a bank account or a brokerage account for the solo 401k, the account will need to be titled in the name of the your solo 401k plan and the EIN for the solo 401k needs to be used by the firm (the bank or the brokerage firm) for reporting purposes on their side.
Not all banks or brokerage firms will provide a bank or a brokerage account for the self-directed solo 401k offered by a company like ours as the firm may view it as competing with their 401k plan offering or just simply don’t understand the process.
Our records show, however, that Merrill (a Bank of America company) will open a brokerage account for a self-directed solo 401k offered by a third party company solo 401k provider such as our firm which they refer to as a Self-Directed Retirement Cash Management Account (RCMA Account). We can prepare these brokerage forms if you would like.,
On the other hand, if you would like to open a bank account instead of a brokerage account at Bank of America then we can provide you with a bank account guide to take to the local bank and we can also then speak with your banker. While our records show that many of our clients have successuflly used Bank of America to hold their self-directed solo 401k funds, it comes down to the local Bank of America branch as to whether or not they understand the process.
Lastly, note that you may also open multiple bank accounts for the self-directed solo 401k as long as the bank accounts are titled in the name of the solo 401k and the banks use the plan’s EIN. This does not mean you have multiple solo 401k plans, which can be an IRS red flag, but rather is deemed as having multiple bank accounts for the same solo 401k plan.

For the bank/brokerage account, can you recommend an institution that has gone through this process and will allow the account creation with minimal hassle? I have existing relationships with the following larger institutions: ETrade, Wells Fargo, Citizens Bank, Vanguard. If you have had any experience with these institutions, please let me know if one is better or worse?

As far as brokerage accounts, the most popular options are Fidelity and Schwab.  E-Trade will also open accounts but some clients find the account opening process cumbersom.  Wells Fargo and Vanguard won’t open brokerage accounts for third party plans.  Based on client experience and feedback, local banks and credit unions tend to work best (note: we have had clients open bank accounts at Citizens Bank).

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

2 Comments

  1. Posted October 22, 2020 at 6:47 pm | Permalink

    When is the best time to set up an account? I am a month out from leaving my current employer and I want to set up a SOLO 401K and Roth SOLO 401K. Would setting up my account with the brokerage TD Ameritrade still allow for checkbook access? When is the current fee of $425 + $125 annual fee due?

    • Posted October 23, 2020 at 12:40 pm | Permalink

      1. For 2020 and going forward the solo 401k establishment deadline is the owner’s self-employed business tax return due date including the business tax return extension due date. For example, if your self-employed business is a sole proprietorship, the solo 401k can be established by April 15, 2021 or by the business tax return extension due date of October 15, 2021.

      2. Yes the self-directed solo 401k that we offer would afford you the option to open the brokerage account for the solo 401k with checkbook control at TD Ameritrade as described in the following link and we would also fill out the TD Ameritrade brokerage forms for you. https://www.mysolo401k.net/solo-401k/ameritrade-solo-401k/

      3. The setup fee and the first year annual fee is due when you sign up for our self-directed solo 401k. Our first-year fee is $650 (including $525 establishment fee and $125 for the first annual fee) which covers everything to establish the plan, including account setup, transfer of existing retirement funds as well as the first 12 months of ongoing compliance support. Starting 12 months later, we charge a flat annual fee of $125.

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