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 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 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.
For money contributed in one year for the previous plan year, you can either count it in the year it was actually contributed (the “cash method”) or you can count it on the form for the previous year (the “accrual method”), but once you pick a method you should stay consistent with that method from year to year. To me the cash method is easier because it matches the report from Fidelity.
Fidelity’s annual valuation statement doesn’t break out the total contributions by the employer and the employee(s) (“participants”) whereas Form 5500-EZ wants the employer and the employee/participant contributions separately. I get an easy out because all my contributions are employer contributions. If you do a mix of employer and employee contributions, be sure to track the breakdown yourself. If you had an incoming rollover, enter the value of the rollover in the field for “Other.”
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
- 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, but you have to remember to file it. The deadline is July 31 each year for calendar year based plans. If you forget, the late filing penalty is $25 per day up to $15,000! Use Certified Mail and keep proof of mailing.
The biggest advantage of a Solo 401k is that it allows employee contributions in addition to employer contributions whereas the SEP IRA 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.
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