If you have a solo 401k, also known as a self-employed 401k or an individual 401k, and the plan’s assets as of December 31 last year exceeded $250k, you are required to file a Form 5500-EZ with the IRS before July 31 each year.
If you dread another tax form, relax. Form 5500-EZ is very easy to do. My plan is with Fidelity. I received my 2011 Retirement Plan Annual Valuation Statement from Fidelity last week. With the information from Fidelity, I completed Form 5500-EZ in less than 5 minutes.
Here’s a filled-out example (click on it if you want to see page 2):
Besides the usual Tax ID, name, address and phone number entries, Form 5500-EZ asks about the plan’s assets at beginning of the year, at end of the year, and the total contributions during the year. As far as the numbers go, that’s it, very simple. I get those numbers from the annual valuation statement from Fidelity.
Fidelity’s annual valuation statement doesn’t break out the total contributions by employer and employees whereas Form 5500-EZ wants the employer and employee contributions separately. I get an easy out because all my contributions are employer contributions. If you do a mix of employer and employee contributions, you can find the number for the employer contributions on your tax return: Form 1040 line 28 “Self-employed SEP, SIMPLE, and qualified plans”. Subtract the employer contributions from the total contributions to get the number for the employee contributions.
If you are filling out Form 5500-EZ for the first time, you have to look up a few codes in the Form 5500-EZ Instructions. The second time you just copy from the previous year. For my plan:
Line 2d Business code:
- 519100 = Other Information Services (including news syndicates, libraries, internet publishing & broadcasting)
Line 8 List of Plan Characteristics:
- 2E = Profit-sharing
- 2J = Section 401(k) feature
- 2R = Participant-directed brokerage accounts provided as an investment option under the plan
- 2T = Total or partial participant-directed account plan – Plan uses default investment account for participants who fail to direct assets in their account
- 3B = Plan covering self-employed individuals
- 3D = Pre-approved pension plan – A master, prototype, or volume submitter plan that is the subject of a favorable opinion or advisory letter from the IRS.
That’s it. Form 5500-EZ is really easy.
If you have a SEP-IRA and you worry about Solo 401k being too difficult to do, don’t. Even if you have to file this extra form once a year, it only takes 5 minutes. The biggest advantage of a Solo 401k is that it allows employee contributions in addition to employer contributions whereas the SEP only allows employer contributions. This is more important if your self-employment income is under $200k or so. If you are not earning big bucks from self-employment, Solo 401k is the way to go. If you are earning big bucks from self-employment, Solo 401k still helps you with Backdoor Roth.