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.
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:
Is there an advantage of having the checkbook in my retail bank versus an investment firm like Fidelity Investments?
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:
Can the brokerage accounts for the solo 401k be set up at Vanguard? Would It be like any other brokerage account or like Vanguards solo 401k with the investment restrictions of their solo 401k?
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:
How many brokerage accounts do I need for my solo 401k plan?
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:
I opened the bank account for the self-directed solo 401k with my local Chase Bank representative. A few months later, I received a letter from them asking me fill out a form to confirm if the plan is subject to ERISA or not. How should I respond?
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.