Do I Need An Ein To Open A Solo 401k

Do I Need A Third Party Administrator For The Solo 401k

July 5, 2018 by Editorial Team

A Solo 401k plan is surprisingly easy to administer. With the Solo 401k plan by Nabers Group, you do not need a third party administrator. In fact, you are allowed to act as your own administrator. Read on to learn about the roles and duties of a 401k plan administrator and how you can make it work for your retirement plan.

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File Business Taxes And Avoid Tax Penalties

If you dont have your EIN by tax day and were supposed to get one, you have to fill out specific paperwork to notify the IRS. If you forget to do that, the IRS might not accept your filing, and you could face penalties for a late return.

Plus, for certain types of tax deductions, such as home office deductions, your chances of an IRS audit decrease if you have an EIN.

If the business owner has any desire to get tax benefits from owning and running a business in-house, such as wanting to deduct a room as an office, then having an EIN will help them make that case better and more effectively, says attorney Janet Gershen-Siegel. Personal office deductions have a tendency to bring on IRS audits. Why not make your case before you have to?

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Solo 401 Plans For The Self

Self-employed workers often have a lot more freedom than their traditionally employed counterparts, but they face unique challenges, too. One of the biggest is the lack of an employer-sponsored retirement account.

When you’re self-employed, the burden of saving enough rests entirely on your shoulders, but a solo 401 can make meeting that challenge a little easier. It’s similar to a traditional 401, but it’s designed specifically for the self-employed. Here’s what you need to know about it.

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How To Set Up A Solo 401

There are specific steps that must be taken to properly open a solo 401 plan, according to the Internal Revenue Service .

First, you have to adopt a plan in writing, making a written declaration of the type of plan you intend to fund. The choices are the same as those given to an employee opening a 401 plan: you can choose a traditional 401 or a Roth 401. Each has distinct tax benefits.

A solo 401 must be set up by Dec. 31 in the tax year for which you are making contributions.

You can open a solo 401 at most online brokers and traditional brokers or directly through a financial services company. You’ll want to do some research ahead of time to identify the best solo 401 company for you.

You’ll need an employer identification number to get started with the enrollment process. If you don’t have one already, you can apply online directly to the IRS.The rest of the documentation will be provided by the broker or financial services company you choose for the account.

How Does A Solo 401 Work

As a reminder, a Solo 401 plan is nothing more than an individual retirement plan for self-employed people or small businesses without any employees. Also, remember that a Solo 401 is nothing more than a vessel youll use to save for retirement. You still have to choose the investments youll use within your account to build wealth.

The biggest benefit of this account is the fact that individuals who use it can contribute considerably more than they can with a traditional 401 plan, which in turn helps these individuals save more for retirement and reduce their taxable income.

As an employer, one of the main features of a Solo 401 is that youll need to determine what your actual income is to determine your maximum employer contribution, which can be up to 25% of your compensation. According to the IRS, your compensation is earned income, defined as net earnings from self-employment after deducting one-half of your self-employment tax and contributions for yourself. But once again, this depends on the business structure for your company.

Solo 401 participants can open their account with any brokerage firm they want, although online providers have become extremely popular due to the fact you can get started at home and on your own time, and often with access to an array of helpful investing tools and resources. Online brokerage firms also tend to come with low costs overall, which is another reason investors seek them out.

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Increased Focus On Sustainability

In a growing response to catastrophic weather events, multiple oceanic garbage patches, the increasing rate of extinction, and the seven hottest annual global average temperatures recorded in the past seven, consecutive years since 1880, consumers are concerned. What does that mean for employers regarding small business trends 2022? A conducted by the National Retail Foundation and IBM found that 62% of the 19,000 survey respondents are willing to change their purchasing habits to reduce their environmental impact. On the hiring side, nearly 68% of employees reported they are more likely to apply for jobs with environmentally responsible organizations, with 48% willing to accept a lower salary.

Employers are responsible for implementing meaningful change in their business practices to reduce the environmental impact of their business model. Look for opportunities to reduce the energy consumption and greenhouse gas output of your supply chain, assess your internal practices to reduce waste, embrace remote or hybrid workplaces for employees, and evaluate your own business’s long-term environmental impacts in the form of packaging and product lines. Ultimately, these are measures that can help your business gain a hiring advantage and increase its own resiliency through being more efficient and responsive to environmental pressures.

What Is Form 5500

IRS 401k form 5500-EZ is an information-only filing completed and filed by 401k plan administrators. Completing and filing this form is part of your responsibility in running your Solo 401k plan.

From the IRS: Form 5500-EZ is used by one-participant plans and foreign plans that are not subject to the requirements of section 104 of the Employee Retirement Income Security Act of 1974 and that do not choose to file Form 5500-SF electronically to satisfy certain annual reporting and filing obligations imposed by the Code.

In other words, the 5500-EZ form reports your Solo 401k annual holdings.

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Contribution Limit As An Employer

Wearing the employer hat, you can contribute up to 25% of your compensation.

The total contribution limit for a solo 401 as both employer and employee is $58,000 for 2021, and $61,000 in 2022 or 25% of your adjusted gross income, whichever is lower.

People ages 50 and above can add an extra $6,500 a year as a catch-up contribution.

In other words, in 2021 you can contribute a total of $58,000 along with a $6,500 catch-up contribution if applicable for a maximum of $64,500 for the year.

You can have a solo 401 even if youre moonlighting. If you have a 401 plan at both jobs, the total employee contribution limits must be within the maximum for the year, but the employer contribution is not limited. If youre one of these lucky folks with two retirement savings plans, talk to a tax adviser to make sure you follow the IRS rules.

January 27, 2014Keywords: Backdoor Roth, self employment, solo 401k

In order to pay minimal taxes when you do a backdoor Roth, you should have no balance in any other traditional, SEP or SIMPLE IRA. If you have a large balance in those accounts, you can rollover the money into an employer-sponsored plan such as a 401k or a 403b before you do the backdoor Roth.

When your employer plan has poor investment options, theres an alternative: set up a solo 401k for yourself. Then you can rollover your traditional, SEP, or SIMPLE IRA to your own solo 401k.

Ein Number For Solo 401k Retirement Trust

Now that the solo 401 plan documents have been drafted and provided for your signature, the next step is to obtain the employer identification number for the solo 401 retirement trust.

Obtaining the EIN for the solo 401 plan is covered in our setup fee however, we will need your social security number in order to obtain the EIN. Therefore, if you prefer to obtain the EIN yourself, you can do so in a matter of minutes via the IRS website.

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Speed Up Business Loan Applications

You can speed up the process of applying for a business loan if you have an EIN. Most lenders dont explicitly require one. As long you have any necessary business permits or licenses and are legally qualified to do business, you can apply for the loan.

The catch is that many lenders require applicants to have a business bank account with a certain number of deposits. This is to ensure that you have a place to receive the loan funds and make periodic loan payments. To get a business bank account, you often need an EIN.

In addition, some lenders, including SBA lenders, check business credit when evaluating your loan application. Having an EIN helps you build business credit, without which you might not be eligible for the loan .

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Contribution Limits If You Participate In Another 401 Plan

If you have a solo 401 and you also work for another company and participate in its 401 plan, the limits on employee contributions are cumulative across all accounts. The employer contribution limits are based on plans, meaning two unrelated employers can contribute up to the employer maximum annually.

Note that anyone who is considering a solo 401 to save earnings from a side job for retirement should check first with a tax professional, who can help confirm your eligibility for the account, including your self-employment status.

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Create A Uniform Way For Employees To Submit Time

A uniform method for submitting PTO requests is an essential step in standardizing the process and effectively managing employee paid time off. It’s also important to note that mosttime-off requests should be submitted in writing. A manager’s verbal approval may not be considered as a replacement or in lieu of a written request.

A typical time-off request form should include:

• Employee name and department
• Reason for requesting time off
• Dates requested
• Employee signature

The time-off form should also include space for the employee’s manager to accept or decline the request, and room for their comments explaining the decision.

This uniform approach mitigates the risk of misunderstandings concerning date and time of a request. It also establishes a specific procedure in which employees should make their PTO requests.

When Does It Make Sense To Open A Solo 401

A Solo 401 isnt the right investment strategy for everyone. Here are some scenarios when opening a Solo 401 makes sense:

• Youre a business owner and the only employee of your company: This might seem like a given, since this is the exact person Solo 401s are for, but its worth mentioning that its also the only person Solo 401s are for if youre not self-employed or if you have additional employees it wont work to open a 401.
• Youre self employed and want a retirement plan your spouse can contribute to: Since you can add contributions from your spouse to a Solo 401, opening one could be a strong strategy if your spouse currently doesnt have a retirement plan or if they havent maxed out other retirement contributions.
• You want the ability to take loans from the plan: While taking a loan from your own retirement plan isnt ideal, the realities of being a small business owner could mean you want or need that flexibility.

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Develop Coverage Strategies For Different Jobs

Not all employee roles work the same way. For example, a delivery driver with established client relationships may be harder to cover than a customer service representative. Determine which responsibilities must be covered while the employee is out of the office and who has the capabilities to provide coverage.

Before an employee goes on vacation, have a clear list of what needs to get done.

Key information to share in these circumstances includes:

• A description of current projects in the works
• Overall job responsibilities
• Essential contact information
• A checklist of other to-do items

Train the people who are covering the tasks and assign a point of contact for help, should questions arise.

What Alternatives Are There To A Solo 401

If you’re on the fence about opening a solo 401, here are some other options you can consider:

• A Simplified Employee Pension IRA is a good option for anyone who’s self-employed. This plan comes with much higher contribution limits than a traditional IRA.
• Keogh plan: Keogh plans are retirement plans for self-employed individuals and come with high contribution limits. However, there are more administrative tasks than you’ll find with other plans.
• Traditional IRA: With a traditional IRA, you can let your money grow on a tax-deferred basis. You won’t pay taxes on the savings until you begin withdrawing the funds at retirement.
• Roth IRA: With a Roth IRA, your money will grow tax-free, and you won’t have to pay any taxes at retirement. And you’ll have the flexibility to use your contributions for certain qualified expenses.

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When Is An Ein Unnecessary

While EINs are necessary for corporations and partnerships, most sole proprietorships actually do not need them.

Similarly, single-member LLCs do not need EINs either, unless the LLC is required to file excise tax returns or employment tax returns. When an EIN is not required, the LLC is said to be a disregarded entity because the business income and expenses are reported on the sole owners tax returns, so a separate tax return is not necessary.

Although trusts is one of the common types of entities that obtain EINs, you will probably not need an EIN if you have created a revocable living trust. That is because these types of trusts typically use the grantors Social Security Number during his or her lifetime. When the grantor dies, his or her revocable living trust will become irrevocable and will require an EIN at that time.

Section 2 Business Information:

You will enter the basic information for your business or self-employment activity here.

The business name can be your full name if you have a sole proprietorship and have not filed a DBA or fictitious name certificate. A lot of our plans are setup for sole proprietors using their personal name.

A business fax number is not required. We have observed fewer and fewer employers entering a fax number and that is just fine.

The business start date can be approximate and can be as recent as today. There is no minimum age for a business or self-employment activity to adopt a plan.

The business address may be the same as your address. If this is true, you may save time by clicking the same as trustee address checkbox.

Select your business form or type. If you do not have a formal LLC, Corporation, etc, you will mark Sole Prop to indicate you have a sole proprietorship. If you have an LLC taxed as a Corporation, you will select LLC. These entries do not affect your tax election status.

For state of formation, enter the state in which your business was formed. Sole proprietorships are formed by default in the state in which you reside and do business.

Enter your business fiscal year end. This is usually the same as the calendar year end of 12/31, however some corporations have opted for a different fiscal year end.

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What Are The Pros And Cons Of A Solo 401

One of the biggest benefits of opening a solo 401 is that it comes with some of the highest contribution limits. Since you can make contributions as an employer and an employee, you can maximize your contributions.

And while you do have to be self-employed to open a Solo 401, it doesn’t have to be your only source of income. If you have a full-time job and consult on the side, you’re eligible to open a solo 401.

You can also choose from a much broader range of assets than you can with a traditional employer-sponsored 401. For instance, you can invest in index funds, mutual funds, exchange-traded funds , stocks, and bonds.

However, there are some downsides you should consider. Like most retirement plans, you’ll get hit with taxes and fees if you withdraw the funds before the age of 59½.

“One disadvantage is that you must have a triggering event, usually retirement or ending employment, to take a distribution,” says deMauriac.

And you’re responsible for managing the plan and handling the paperwork on your own.

Post A Calendar For Everyone To See

In a public area of the workplace or online, post an easy-to-understand calendar reflecting time off that has already been submitted and granted.

An up-to-date calendar can help alleviate any possible frustration from employees asking for time off on days already booked by others. It also helps identify when it may be necessary to recruit and hire additional seasonal help.

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