For solopreneurs and small business owners, establishing a Self-Directed Solo 401k offers significant advantages. These plans boast high contribution limits, loan options, and the flexibility of Roth savings. In a Self-Directed Solo 401k, you, as the business owner, act as the plan sponsor, granting you greater control over investment choices.
Unlike IRAs, which typically rely on your social security number due to custodian oversight, Solo 401k plans require a clear separation from your personal and business assets. This distinction is achieved by obtaining an Employer Identification Number (EIN) specifically for your Solo 401k trust. This EIN functions as a unique tax identifier for your retirement plan, separate from your business EIN or social security number. It is also used for other filings such as the issuance of 1099-Rs for distributions and additional filings such as the IRS Form 990-T.
This distinction is important to ensure your Solo 401k benefits maintain its tax-advantaged status. Without an EIN, the contributions and earnings in your retirement account could be mistakenly taxed as part of your business income (if using your business EIN) or personal income (if using your social security number). This would defeat the purpose of a Solo 401k - allowing tax-deferred retirement savings.
While the employer's Employer Identification Number (EIN) is used on Form 5500-EZ to identify the business, the plan's assets are tracked using a separate EIN. This distinction ensures accurate tracking of your retirement assets and savings within the plan and helps maintain the plan's tax-advantaged status.
Similarly to how you must establish a separate bank account for your Solo 401(K) and one for your business, you need to also set up an EIN to avoid any error or confusion of funds and assets in your tax-deferred retirement account. Since the checking account under the plan is part of the plan’s assets the plan’s EIN must be used to establish the checking account for the 401(k) plan.
In short, the EIN helps maintain the separation between your business activity and plan’s activity providing clarity of your Solo 401k for both you and the IRS.
It's possible that big institutions like Fidelity may not require an EIN for Solo 401k accounts because they use their own EIN as investment provider for the investments. This is partly because they may only offer traditional investment products or brokerage accounts for their plans. This may also be true for the following reasons:
Limited to traditional assets: Traditional investment products typically refer to stocks, bonds, and mutual funds traded on major exchanges. These can be easily tracked and managed without the complexities of an EIN.
Simplified account setup: By not requiring an EIN upfront, banks can streamline the initial setup process for Solo 401k accounts. This may be attractive to some new Solo 401k holders.
Internal tracking: Some banks may have internal systems that allow them to track Solo 401k accounts using the owner's social security number instead of an EIN.
Simplified administration: Without the ability to invest in alternative assets like real estate, private equity, or directly held businesses, the administrative burden for the bank is lower. An EIN might be seen as unnecessary for these more straightforward investment options.
While some financial institutions, such as Wells Fargo, Charles Schwab, and Fidelity, may not require an EIN for Solo 401k accounts, it's still beneficial to obtain one for your Self-Directed Solo 401k. It offers advantages when record-keeping and professional management of your retirement plan since you are the plan sponsor. Also, the IRS states employers should apply for an EIN for the plan for the following reasons.
A retirement plan trustee should apply for an EIN for the plan's trust in order to properly:
-report Form 945 for deposits and other income tax withholding information,
-provide Form W-9 to requesters of tax identification number certifications,
-report Form 990-T for exempt organization business income, and
-report retirement plan trust information
-An IRA trustee/custodian should apply for an EIN for the IRA to report unrelated business taxable income on Form 990-T.
Source: IRS Website
If you are moving over a Solo 401(k) to IRAR and you don’t have an EIN, don't worry. You can still set one up. Here are the steps to help you obtain the EIN for your IRAR Solo 401(k).