Yesterday, we discussed some of the basics of the Individual 401(k) including the eligibility requirements, the loan provision, and the contribution limits.
Unlike an IRA, with an Individual 401(k), you do not have to have a Custodian and you may act as your own trustee. You will need to make sure to get an IRS Approved Plan Sponsor to create your Individual 401(k) Plan. Once your plan has been created, you will need to open a checking, banking or brokerage account in the name of your 401(k), which you will use to make contributions, take distributions, make investments, etc.
Your IRS Approved Plan Sponsor should provide you with everything that you will need to administer the plan yourself. You will need to work closely with a trusted CPA or tax professional to make sure that you are in compliance with all IRS rules dealing with contributions and investments. It will also be very important for you to keep good records. We recommend using Quickbooks or some other type of record keeping software to keep good track of all transactions within your Individual 401(k).
When you receive your plan, you will also need to designate your beneficiaries. You will use the beneficiary form in your Individual 401(k) plan packet to designate who you would like to be the beneficiaries of your 401(k) plan. Anytime you do any type of transaction in your 401(k) plan, you will need to make sure to fill out the appropriate form and keep it for your files to prove what you have done, in case you ever get audited.
Please remember that this is an extremely simplified explanation of the Individual 401(k). To get more information on the Individual 401(k) and find out if it is the right retirement plan option for you, make sure to contact a CPA or tax professional.
Tomorrow on the blog, we will talk about 401(k) rollovers and reporting requirements.