By Dr. James M. Dahle, WCI Founder
Solo 401(k)s might be the best retirement account out there, combining all of the best attributes of other tax-protected retirement accounts:
- Low cost
- Flexible
- High contribution limits
- Broad investment options
- Roth contribution options
- Catch-up contributions
- After-tax contributions, plus in-plan conversions
- Loans
- Asset protection features
Learn more about this powerful investing account below.
What Is a Solo 401(k)?
A solo 401(k), sometimes called an individual 401(k), is simply a 401(k) retirement plan for a one-person company. If you are self-employed as an independent contractor (i.e. paid on a 1099), this is almost surely your retirement account of choice. Just like any other 401(k) in 2023, you can contribute $22,500 ($30,000 if 50+) into the plan as an employee deferral/contribution, and your employer (i.e. you) can contribute another $43,500 into it for a total of $66,000 ($73,500 if 50+).
Can I Use a Solo 401(k)?
To use a solo 401(k), you must be self-employed, and you must not have any non-spouse employees/partners that would qualify to use the 401(k). A solo 401(k) is simple enough that it is reasonable to implement one as a do-it-yourself (DIY) project. Once you have employees, that is no longer the case, and you should seek out professional help and advice to study your business/practice to help you determine which of these retirement plans to put in place:
- 401(k)
- SEP-IRA
- SIMPLE IRA
- SIMPLE 401(k)
- No plan at all (invest in taxable)
Your spouse can also participate in your solo 401(k); you can each have a separate account within the same 401(k). Note that all businesses that you own are considered related, so if you own any business with qualifying employees, you cannot use a solo 401(k).
Note that being a partner (paid on a K-1), even if you form an S Corporation to be the partner, does not permit you to use a solo 401(k). You can only use the retirement plans provided by the partnership.
More information here:
Backdoor Roths, Solo 401(k)s, and the Safe Harbor Rule Q&A
How Many 401(k)s Can I Have?
Many doctors qualify to use two 401(k)s. It is possible to qualify to use three or even more, but in practice, this is rare. You are allowed to contribute no more than $22,500 ($30,000 for 50+) [2023] total as an employee contribution to all 401(k)s and 403(b)s you are eligible to use, although this amount can be split between the 401(k)/403(b)s in any way you choose. If that were the only contribution, there would be little point to using multiple 401(k)s except to try to maximize the amount of employer matching dollars you might qualify for. However, each 401(k) from an unrelated employer has its own maximum contribution amount of $66,000 that can be made up of the following four types of contributions:
- Employee tax-deferred (traditional) contributions/deferrals
- Employee tax-free (Roth) contributions/deferrals
- Employee after-tax contributions
- Employer contributions (profit-sharing, matching, or penalty)
Many doctors have a regular job that provides them a 401(k) or a similar account—the 403(b). They use up their $22,500 employee contribution there and also receive some matching employer dollars. They may also moonlight on the side and may also open up a solo 401(k) for the moonlighting dollars. However, they generally just make employer contributions of up to 20% of their net income (net of all expenses including the employer half of payroll taxes) from self-employment to the solo 401(k).
An Example of Multiple 401(k)s
Dr. Rodriguez is a 43-year-old neurologist who makes $380,000 per year as a hospital employee. The hospital provides a 401(k), and the doctor puts $22,500 into it. The employer matches the first $10,000 at a rate of 50%, so the total contribution to that 401(k) is $27,500. Dr. Rodriguez also moonlights on weekends at a completely unrelated hospital where they are paid on a 1099 as an independent contractor, making another $100,000 per year. They contribute $20,000 as an employer contribution to the solo 401(k).
How Much Can I Contribute to a Solo 401(k)?
Maximum contributions depend on a lot of factors. The first is whether you already used up your employee contribution in another 401(k) or 403(b). The second is how much income you have. The third is what types of contributions are permitted by the plan. The fourth is the contribution limits that the IRS has put in place for that particular year. Finally, your age can also affect your contribution limits.
For 2023, the maximum employee contribution (Roth or tax-deferred) for someone under 50 is $22,500. For those 50+, it is $30,000.
For 2023, the maximum total contribution (employee and employer contributions) is $66,000, although that does not count the $7,500 catch-up employee contribution that those 50+ can make.
Employer tax-deferred contributions are limited to 20% of net self-employment income. So, someone with only $10,000 in net self-employment income could only make an employer contribution of $2,000, but someone with $330,000 in net self-employment income could max out the entire account ($66,000) with only employer contributions.
Suppose you cannot max out the account with employee deferral contributions (Roth or tax-deferred) and employer contributions. In that case, it's possible to make up the difference with employee after-tax contributions if your plan allows it. You can never contribute more to the account than you earned in self-employment income.
More information here:
Best Retirement Savings Plans for the Self-Employed
Isn't it 25%?
Whether you use 20% or 25% when you talk about it, t's really the same amount of money for most docs using a solo 401(k). They've already used up their employee contribution elsewhere. The 25% amount DOES NOT include the contribution in the denominator. If you include the contribution in the denoninator, it's 20%. So if you made $100K in net self-employment earnings, you can contribute $20K as an employer contribution. That's 25% of $80K and 20% of $100K. Same number.
What About for an S Corp?
S Corps pay salaries and distributions (saving payroll taxes on distributions) and your employer contribution is limited to 25% of what you pay yourself as a salary (but again, if you pay yourself everything as salary, it's 20% of what the business made.)
Any Other Quirks?
Yes. There is one other little rule to be aware of if you're putting your employee contribution into the Solo 401(k), especially if you only made a four or five figure amount in this business. The employer contribution cannot be more than 1/2 of the difference between the net self-employment income and the employee contribution.
Is There an Easy Way to Do This?
Yes, just use Mike Piper's excellent calculator.
Should I Use a Solo 401(k) or a SEP-IRA?
Our general recommendation for a self-employed retirement account is a solo 401(k) instead of a SEP-IRA for two reasons.
The first is that due to the ability to make employee contributions (including the $22,500 employee deferral contribution if not used elsewhere and with employee after-tax contributions), it is often possible to make a larger contribution to a solo 401(k) than a SEP-IRA, despite both accounts having a total contribution limit of $66,000 [2023].
The second is that SEP-IRAs (at least tax-deferred ones) count toward the pro-rata calculation associated with the Backdoor Roth IRA process (as calculated on Form 8606), and solo 401(k)s do not. Since most high-income professionals are (or at least should be) doing Backdoor Roth IRAs each year, they must use a solo 401(k).
The main advantage of a SEP-IRA over a solo 401(k) is simplicity, i.e. less paperwork. It can be opened and funded more quickly, and there is no requirement to file Form 5500 EZ once the account has more than $250,000 in it. You could also open a SEP-IRA after the end of the calendar year but not a solo 401(k).
However, that changed with the passage of Secure Act 2.0. You can even make employee contributions after the end of the calendar year now, all the way up until your tax day. Secure Act 2.0, though, also provided a way for SEP-IRA users to still do a Backdoor Roth IRA. Starting in 2023, Roth contributions can now be made to SEP-IRAs, and those won't count in the Backdoor Roth IRA pro-rata calculation.
Despite the changes with Secure Act 2.0, the solo 401(k) should still be the default retirement account for the self-employed.
What About Self-Directed and Custom-Designed Solo 401(k)s?
“Self-directed” is a vague term that is easy to misunderstand. All Defined Contribution (DC) plans like 401(k)s are self-directed in a way, in that you can choose your investments from among several mutual funds. Many allow a “brokerage window” (such as Schwab PCRA or Fidelity BrokerageLink) that permits you to buy many other publicly traded and even some privately traded securities so long as they are available at that particular brokerage.
However, when most people talk about a self-directed IRA or 401(k), they are referring to a much more flexible investing vehicle. A common variation of these is called a “checkbook IRA” or “checkbook 401(k).” These accounts hold a single investment: an LLC. That LLC opens a bank account. Contributions to the 401(k) go into that bank account, and they can be used to invest in any investment legally permitted in a retirement plan. All income from the investment goes back into the bank account, and all expenses for the investment are paid out of that bank account. Using these plans, one can invest in all kinds of investments including:
- Mutual funds
- Individual stocks, bonds, and other securities
- Certain types of options
- Precious metals, such as gold and silver
- Cryptocurrencies, such as Bitcoin
- Non-Fungible Tokens (NFTs)
- Private real estate syndications and funds
- Certain types of hedge funds
- Direct real estate
- Anything that isn't specifically prohibited
While we don't necessarily recommend you invest in all of these investments, it is possible to invest in these inside a 401(k), as long as it is a self-directed 401(k). In fact, it is better to invest in leveraged equity real estate in a self-directed 401(k) than in a self-directed IRA due to the avoidance of Unrelated Business Income Tax (UBIT).
While the easiest and cheapest solo 401(k)s are available at the big brokerage and mutual fund companies—such as Vanguard, Fidelity, Charles Schwab, eTrade, or TD Ameritrade—these are “cookie-cutter”/”off the shelf” solo 401(k) plans that may not allow you to do everything that the IRS allows you to do inside a 401(k). When the 401(k) rules are stricter than the IRS rules, the 401(k) rules govern.
So, some investors opt to get a custom-designed plan to ensure they have all of the available features. That may include a self-directed investment feature. It also often includes features that allow employee Roth contributions, employee loans, employee after-tax contributions, in-service withdrawals, and in-service Roth conversions. While cookie-cutter plans from the big companies generally have no fees, the smaller companies that do these custom-designed plans generally charge a few hundred dollars to set up these plans and to maintain them each year. You may also get additional services in exchange for that fee, such as preparation of Form 5500-EZ once the plan has at least $250,000 in it.
There is some debate as to whether you need a separate advisor, Third Party Administrator (TPA), and recordkeeper or whether the company offering the customized solo 401(k) can adequately perform all three roles. My own opinion is that it is fine to just use the company, but recognize that this is only a DIY project for true finance nerds. If you don't consider personal finance and investing one of your important hobbies, it is probably best to get professional help for a customized/self-directed solo 401(k).
What's the Mega Backdoor Roth?
This is not to be confused with the Backdoor Roth IRA process (which involves a contribution to a traditional IRA followed by a conversion of those dollars to a Roth IRA). The Mega Backdoor Roth IRA involves employee after-tax contributions to a 401(k) (including a solo 401(k)) usually followed by an in-plan Roth conversion into the Roth subaccount of the 401(k) of those dollars. It is called a Mega Backdoor Roth IRA because the contributions are so much larger than they are for a Backdoor Roth IRA. In 2023, those contributions can be as high as $66,000, dwarfing the $6,500 those under 50 can contribute indirectly to a Roth IRA via the Backdoor Roth IRA process. To do the Mega Backdoor Roth IRA process, your plan must allow BOTH
- After-tax employee contributions AND
- In-plan Roth conversions (or in-service withdrawals to a Roth IRA).
After-tax contributions aren't very useful without the Roth conversion step since their earnings (unlike true Roth contributions) are still taxed at ordinary income tax rates upon withdrawal. While the tax-protected growth can eventually overcome (likely after decades) that higher final tax rate, a tax-efficient investment in a plain old taxable brokerage account will likely outperform an after-tax retirement account for a long time due to the lower long-term capital gains and qualified dividend tax rates. In-plan Roth conversions can be useful by themselves to convert pre-tax dollars to after-tax dollars, but to do the entire Mega Backdoor Roth IRA process, both of these steps need to be permitted by the plan.
Where Should I Open a Solo 401(k)?
The first decision you need to make when deciding where to open your solo 401(k) is whether you are fine with a cookie-cutter, off-the-shelf plan from the main mutual fund companies/brokerages or whether you are willing to pay a little more for a fully customized plan that allows for self-directed investments and special features, such as the Mega Backdoor Roth IRA process. If you're fine with the standard options, your top choices are Vanguard, Fidelity, Schwab, eTrade, and TD Ameritrade.
Note that these companies also serve as the custodians for many customized plans. The fully customized plan (sometimes called a “non-prototype account”) I had for a couple of years was held at Fidelity (where the WCI 401(k) is now), although Fidelity was not the designer of the plan.
Standard ‘Free' Solo 401(k) Plans
There are five good choices here. You can read more about them and the experience that white coat investors have had with them in the comments on this post, originally published in 2014.
Vanguard
Vanguard, the mutually owned mutual fund company, is my usual default choice for most things. I love its focus on low costs, although that can sometimes make its IT interfaces and customer service lacking. Sometimes you do get what you pay for. However, if you already have investments at Vanguard, such as your Roth IRA or taxable brokerage account, you can see and invest in your 401(k) from the same login. You will make contributions at a separate website with its own dedicated customer service team, which offers somewhat better service than the main Vanguard call-in line. Years ago, the Vanguard solo 401(k) did not allow for IRA rollovers into the plan. That is no longer the case. It also used to require you to use the higher cost “Investor” shares instead of the lower cost “Admiral” shares. That is also no longer the case, making Vanguard once again the king of the “standard” solo 401(k). The standard Vanguard solo 401(k) allows Roth contributions but no 401(k) loans and no real brokerage option. I have had a solo 401(k) at Vanguard in the past, and I continue to have my brokerage, Roth IRA, and UTMA accounts there.
Fidelity
Fidelity is a privately owned mutual fund and brokerage company which I have been pleased with over the years. Its customer service is generally excellent. The investments in its standard 401(k) are Spartan Index Funds and ETFs (many are commission-free) via its brokerage option. However, Fidelity does not have a Roth contribution option, and it does not permit 401(k) loans.
Charles Schwab
Schwab is a publicly owned mutual fund and brokerage company with an excellent reputation. I have also personally used Schwab for years. Its standard 401(k) allows you to invest in ETFs via its brokerage feature. Like Fidelity, it does not offer a Roth contribution option or 401(k) loans.
eTrade
eTrade is a brokerage company that has been around since the 1990s. At one point, many considered it the top standard solo 401(k) option since it allowed ETF investments through its brokerage feature (many excellent ETFs and even Vanguard mutual funds are offered commission-free), Roth contributions, 401(k) loans, and IRA rollovers. However, I have also heard lots of complaints about it over the years, especially with regard to botching paperwork and requiring paperwork for things that other companies allow you to do online. When your customer service drops below that of Vanguard, you really have to wonder. Since Vanguard improved its solo 401(k), eTrade is no longer my top recommendation. It still offers a 401(k) loan feature that Vanguard does not, but my impression is that you still get better service at Vanguard.
TD Ameritrade
TD Ameritrade is a brokerage company founded as Ameritrade in 1971 and combined with TD Waterhouse in 2006. I once briefly had a TD Ameritrade account as part of a Health Savings Account and found its interface just as functional as anyone else's. The main investments you would use in a TD Ameritrade solo 401(k) are ETFs via its brokerage option, many of which are offered commission-free. It allows Roth contributions and IRA rollovers into the plan but no longer allows 401(k) loans (since its merger with Schwab). While not a lot of white coat investors use the TD Ameritrade solo 401(k), those who do seem pretty happy with it.
Self-Directed/Customized/Non-Prototype Solo 401(k) Options
Most of these companies are relatively small companies, sometimes just one or two people. But for a few hundred dollars, they will give you a fully customized solo 401(k) that includes all of the features legally allowed in 401(k) plans, including Mega Backdoor Roth IRA contributions and self-directed investments.
MySolo401K.net
MySolo401K.net is a small company that Katie and I used for the WCI 401(k) until we had employees and had to get a “real” 401(k). Fees were reasonable ($525 to set up, $125 ongoing), and the service was good. It had all the features we needed.
RocketDollar
RocketDollar is thought to be particularly good for real estate investments in the solo 401(k). It was an affiliate partner with WCI for many years. It has cheaper setup fees ($360) but slightly higher ongoing fees ($180 per year) compared to MySolo401K.net.
Broad Financial
Broad Financial is also an affiliate partner with WCI, so this is an affiliate link. It doesn't charge a setup fee, just a flat annual fee.
Ubiquity
I don't know Ubiquity as well as these others, but it shows up on lots of lists of recommended fully customized solo 401(k)s. Plans start at $228 per year, but it's not clear from the website exactly who might pay more than that.
Employee Fiduciary
Employee Fiduciary has an excellent reputation and offers a fully customized solo 401(k). It charges $250 to set up the account and then $500 plus 0.08% of AUM per year.
Another option is to use the companies we recommend for people setting up 401(k)s for their practices. While these folks generally charge more than the above providers, you do get a much higher level of service, and the 401(k)s they set up can grow with your business. These companies include:
- CarsonAllaria Wealth Management
- iQ401K (FPL Asset Management)
- Wellington Retirement Solutions
- Litovsky Asset Management
- Emparion
If you need more information, check out our retirement accounts page.
Are Solo 401(k)s ERISA Accounts for Asset Protection Purposes?
No! A significant distinction exists between solo 401(k)s and “real” 401(k)s when it comes to asset protection. Solo 401(k)s generally get the protection that IRAs get in their state. In many states (like mine in Utah), that is still unlimited protection in bankruptcy, but some states provide more limited or even no protection at all to your creditors in bankruptcy.
You can learn more about asset protection by reading The White Coat Investor's Guide to Asset Protection: How to Protect Your Life Savings From Frivolous Lawsuits and Runaway Judgments.
Should I Make Roth or Tax-Deferred 401(k) Contributions?
Unfortunately, there is no easy answer to this question. Knowing the right answer with certainty requires a functioning crystal ball—not only about future tax code changes but about your personal life. The rule of thumb is to use tax-deferred contributions during your peak earnings years and Roth contributions in all of the other years. But there are plenty of exceptions, the most notable being large amounts of non-retirement plan income in retirement that fills the brackets and being a supersaver.
You can learn more about whether you should do Roth or tax-deferred contributions here. Note that due to the Secure Act 2.0, catch-up contributions for high earners will soon have to be Roth, and employer-matching contributions can be Roth (which will likely include the profit-sharing “employer” contributions made to solo 401(k)s).
What Other Retirement Account Should I Consider If I'm Using a Solo 401(k)?
If you have a lot of self-employment income and wish to save even more of it in a tax-deferred account, consider a personal defined benefit/cash balance plan, especially if you are a very high-income doctor in your 50s or 60s. While the fees and complexity are higher, contribution limits to these plans are actuarially determined. Oftentimes, they are six figures, and they can even be more than $200,000 per year. That could potentially knock as much as $100,000 off your tax bill next year. These plans do need to be coordinated with your solo 401(k). Schwab offers a personal defined benefit plan, but most would do well to hire a professional from one of the lists above (such as Emparion) if they wish to implement this sort of plan.
What's the Deal with Form 5500-EZ?
When the assets in a 401(k) reach $250K, a Form 5500 must be filed each year or you'll face a massive penalty. For a solo 401(k), you usually only need to file Form 5500-EZ. If you forget, read this post.
Where Can I Get Help with Retirement Accounts Like Solo 401(k)s?
If you find all of this overwhelming, contact one of the firms linked in this post. It is easier than it initially seems to set up a solo 401(k), but it is nice to have someone walk you through it the first time. Many white coat investors have done this before you, and you can do it too.
What do you think? Do you have a solo 401(k)? Which one did you choose, and are you happy with it? Comment below!
I am thinking of opening a solo 401k to rollover funds from a cash balance plan in the future. I am planning on using income from surveys to open it. Wondering if I need annual income/contributions to keep the plan open or if having survey income this year alone is sufficient?
It’s all a spectrum. The more it looks like a “real business”, the better in the event of an audit. I don’t think this is a common audit point though.
With Secure 2.0 allowing Roth employer contributions to solo 401k, I’m very interested in doing this with small sums of survey income. However, how do you avoid being “double taxed” on the solo income and then on the employer Roth contribution (20% profit sharing of that solo income) (e.g. my understanding is that employer Roth contributions will be added to my W2 income for my 401k at my W2.) Thanks!
I think you’re confused. You’re not double taxed. Anything that becomes taxable income to you personally becomes a deduction to the business.
Thanks for your help as always! Sorry, clearly I am confused. So, my employer Roth contribution on behalf of employee me, which would be a compensation to me, becomes an employer deduction, so it would balance out? Is that the gist? Thanks again.
Yes.
Hi sorry, I am very new to being a 1099 employee and trying to see what my best options may be. Theoretically, if I make 50k on my 1099, can I open a solo 401k and make an employee contribution of $22,500 and then make an employer contribution of $5,500(making my taxable income 22k)?
Also, My husband also has an S corp with his practice (which I have no affiliation with outside the fact we are married and filing jointly on returns). Does his S Corp hinder me in anyway to make these contributions?
Not enough detail to answer questions. Got another job with a 401(k)? Does your husband’s S Corp have employees?
My husbands practice has a S corp and he gets paid a salary and distributions from the S corp. I guess I need to figure out how his S Corp is set up?
I don’t have another 401k job. I do have a previous 403b but am no longer employed there or contributing to it.
If your husband is the sole owner of the practice it could be grouped together with your business for 401k purposes which could limit your contributions. If not then yes, you can do your employee contribution into your 401K plus an employer contribution and if the plan allows it, after-tax contributions.
I think the contribution limit is 25% not 20%. Reference: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/401k-self-employed-owner-only-business.pdf
When people tell me that I always ask this follow-up question:
“25% of what?”
If your answer is that you have an S Corp and thought you could only contribute 25% of your salary as an employer contribution to a Solo 401(k), I will tell you that you are right. However, that contribution is not counted in the salary.
For a sole proprietorship, partnership, or LLC filing as one of those, the contribution is also 25%….of the amount of your net self-employment earnings. Net of what you might ask? Well several things, INCLUDING THE CONTRIBUTION.
So basically, it’s either 20% of your net self employed earnings INCLUDING the contribution or 25% of your net self employed earnings NOT INCLUDING the contribution, but it’s the same number. Slightly different if you’re trying to save some Medicare tax using an S Corp, but basically the same thing if you’re trying to max out the Solo 401(k). If you already used your employee contribution at your main gig and made $100K at your side gig, you can put in $20K as an employer contribution. That’s 20% of $100K or 25% of $80K. Same same.
Hi WCI – thank you for your very helpful posts! My significant-other individually owns and manages two rental properties in addition to his normal job through which he contributes to a 401a (with employer matching) and 403b (maxed). One property is a long-term rental and the other is a local short-term AirBnb rental (he does the management, maintenance, and most of the cleaning and has no employees). The latter seems to qualify as a business by IRS “material participation” rules if the average rental period is less than 7 days. Is he eligible to open a solo401k? If so, does he need to formally create a business entity or simply get an EIN? How would he determine how much he can contribute? After expenses, the income is modest. If we get married and keep the short term rental, would I also be eligible to open a solo401k?
As a general rule, real estate income is not earned income and can’t be used to contribute to retirement accounts. But a short-term rental management business probably could. I might have the rental owned by one LLC and have it pay fees to another company to be the manager to make it nice and clear though. Is it worth the hassle for modest income? Probably not.
This is a somewhat gray area so the answers aren’t so cut and dried. The only real rule there is that if you keep rental durations to less than 7 days on average it can be active/earned income. That means you can use it for retirement account contributions. It also means you have to pay SS/Medicare tax on it. That might not be worth it to you.
If you have time, could my situation be an example case?
Married 40 yo, stay-at-home spouse manages one long-term rental and one short-term rental. Hospital #1 is full time and gives mediocre 403b. On the side, I’m independent contractor at other hospitals. Annual Salary at Hospital #1 300k. Independent Contractor brings in 200k. Rental income PROFIT probably 20k. (spouse might reach the 750 hour real estate professional thing . . . )
Investing Strategy 2022:
$22500 into 403b + employer match
$40k (20% of 200k) into solo 401(k)
$6500 backdoor Roth – me
$6500 backdoor Roth – spouse
$7750 – HSA
Am I missing a strategy there? I’m trying to decipher if there is some benefit to me putting a percent of my 22500 limit into the 401k instead of 403b . . . doesn’t seem like it matters in my case.
Not sure how “Spouse can also participate in 401k” ??
Will I screw that same model up for 2023 if I start another side business with 4 owner/partners later this year?
Can I pay my 12 yo kid to work for the Real Estate company and dump it into a Roth IRA for her? Probably have to pay SS tax I guess??
Lastly, is there an advantage to making after-tax contributions to my solo 401(k) if I’m not attempting the Mega Backdoor Roth thing with it later?
Sounds to me like you’re just right. Any other savings goes into taxable.
Your spouse doesn’t have earned income, so no 401(k).
You could do a third 401(k) for a third unrelated business and put 20% in that.
Remember there is also the option to do after-tax contributions/mega Backdoor Roth which can be a higher contribution, but it would have to be Roth. Little advantage to the contributions without the option though.
The question regarding spouse comes from your article above on this page:
SECTION: “Can I use a solo 401(k)?” You write a comment in that section which reads “Your spouse can also participate in your solo 401(k)”
It’s not clear to me exactly how my “spouse can participate” in it? Does my side hustle LLC need to pay her as an employee and then match or something?
They have to have earned income. For example, when Katie and I owned WCI as a partnership, we each contributed to the same solo 401(k).
How does one make the “net self employment income “ calculation to determine the 20% employer contribution to the solo 401 k? What do I subtract from the gross number on the 1099?
https://obliviousinvestor.com/solo-401k-contribution-calculator/
Hi White Coat Investor,
Thanks for all that you do. Not sure I’m following the math in the calculator/description you above, would appreciate some clarification on my situation:
I make $80k/year at W2 job, and have contributed the maximum to my 401k as an employee ($22.5k)
I also am self-employed, have a solo 401k, and would like to make the maximum contribution to my solo 401k as an employer, my total net profit is $100k.
Therefore to calculate maximum contribution: $100k – (1/2 SE = $7.65k) = $92.35k
20% of $92.35k –> $18.47 max contribution
The calculator shows that the net earnings from self-employment should be $100k minus the deduction for one half of self-employment tax, ($1,399.080) –> $98,660.92.
20% of this would be $19,732.18.
Clearly there’s a discrepancy on how SE tax is being calculated, could you please clarify if I’m doing something wrong, or if the calculator is off?
Thanks for all that you do,
Michael
Also, found one other calculator at this link, which provided an entirely different number, $18,737… so clearly there’s some discrepancy somewhere and I’m not sure which to correct.
https://www.gocurrycracker.com/solo-401k-contribution-calculator/
Thank you for all that you do,
Michael
https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-contribution-and-deduction
What are the rules if we have a sole proprietorship and a separate (sole) LLC? I know it’s considered brother-sister because I am the sole owner of these two businesses (with separate EINs). Does that affect anything?
I’ve found conflicting information on if you should have 1 plan or 2 in this situation. I’ve heard having 2 can put you at higher risk for audit.
I know the limitation of $22,500 for employee contribution is still applicable. But what about employer contributions if you have 2 separate solo 401ks?
If you should have only 1 solo 401k, how does it work administratively if the sole proprietorship has a 401k and the LLC is formed later? What if the sole prop later closes but the LLC is still going? Etc
You could have two plans if you want but they would share the same contribution limit so no real point.
No big deal if you close one business later. The IRS will basically consider them all the same business for tax and retirement plan purposes.
First time opening a solo 401k. Business structure is sole prop. I’m a little confused on how to report on the tax forms assuming I max out it out pre-tax in 2023 (e.g. $66k). Goal is to get the full $66k off of the Federal & NYS Income tax forms.
Do I report the employER contribution of $44k on Schedule C, line 19? And then the employEE part on Form 1, part II, line 16? (Which then gets moved over to line 10 on form 1040? The schedule C trickles over nicely to the New York State Income tax form but what about the employEE portion…how does that get accounted for?
You should probably just put the whole $66K on line 16 of Schedule 1 like most of us. 🙂
Just teasing, but that’s really where it goes.
2023 is the first year I’ll be making serious 1099 income (e.g. most of my yearly salary). I opened a solo 401k. I see on the federal tax forms how it can be tax deductible on schedule C / form 1. However, I don’t see how it is “tax deductible” or “pre-tax” on the New York State income tax forms. Are solo 401k contributions generally state tax deductible as well?
Generally yes. I don’t know of a state where they aren’t. You don’t report it on Schedule C though. It goes on Schedule 1 line 16 for sole proprietors.
Hello WCI,
I’m a casual WCI reader so forgive any faux pas in my question but I was hoping for some clarity on a couple areas of recommendations. I will use a “hypothetical” situation to set this up:
-Employed doc at nonprofit hospital – maxes out 403b with employer 50% match
-Spouse has side hustle business website where spouse is only employee that just became profitable this year. It is organized as sole member LLC so for tax purposes reports as sole Proprietorship. Spouse is stay at home parent with no income otherwise.
-For purposes of argument will say operating margins will allow for $30k in potential contributions to some sort of retirement plan.
Questions:
1. Does a solo 401k make sense for spouse to setup?
2. I used the website you pasted above and it gave $25,190, which consists of: An employee contribution of $22,500, plus an employer contribution of $2,690.28. Does this make sense? You mention “Employer tax-deferred contributions are limited to 20% of net self-employment income” Does the 20% of income situation not apply in this scenario?
Thank you in advance for any guidance.
1. Yes
2. Sounds about right. At those low income amounts the calculation gets a little complicated that’s why I referred you to Mike Piper’s very useful calculator. https://obliviousinvestor.com/solo-401k-contribution-calculator/
I asked Mike about this situation once by email a few years ago. He sent me back a long email including multiple bits of algebra. Trust me when I say you should just use his calculator. Let me see if I can find the email and post his answer here:
Basically, there’s ANOTHER limitation besides the 20% of net self-employment earnings such that employer contribution cannot be more than 1/2 of the net SE earnings and the employee contribution.
So in your case, she makes $30K. But that has to be reduced by the employer’s payroll taxes to get to net SE income. That’s 7.65% for her. So $30K * 7.65% = $2,295. So net SE earnings are $27,705. So normally 20% of that would be $5,541. However, there’s that other pesky rule. The difference between $27,705 and $22,500 is $5,205. Half of that is $2,603. That’s not exactly what you (and the calculator) got so I might be missing something, but it gets you into the ballpark. Suffice to say that in this situation (large employee contribution and maximizing the employer contribution on a relatively small amount of earnings) you should use the calculator to determine your contribution. I probably ought to add that to the post.
Haven’t found clear guidance on this situation:
My wife has a solo 401k for her primary career, but this year became a W2 employee in the same field and no longer has any 1099 income in that profession. She does still have a small amount of 1099 income via an unrelated side hustle. Do we have to create a new solo 401k for that business, or can we just start contributing to her existing solo 401k despite a change in the type of business? And if we’re not allowed to do that, any idea how soon we would have to close her existing solo 401k (assuming she stays as a W2 employee)?
Is it actually a separate business? I doubt the IRS would consider it different. Same EIN/SSN? Same business.
You don’t have to close a business nor its 401k just because you don’t have a profit in a given year. There is no clear guideline but if there were it would certainly be years long.
All her 1099s from both businesses are to her ssn as sole proprietorship, although we did get an ein for the purposes of setting up her solo 401k. Sounds like legally they’d be the same business then even if the income source is very different.
I agree. She should get her 1099s in the name/EIN of the business though.No big deal but I’d fix it for this year.
Can you explain how this works?: “Starting in 2024, Roth contributions can now be made to SEP-IRAs”
If I have an existing pre-tax SEP, it would not make sense to make after-tax Roth contributions to that account because withdrawals would be double-taxed. So would this be a new after-tax Roth SEP IRA account then? How is that different from a regular Roth IRA?
Well, first of all it’s 2023, not 2024. Just that no one has rolled one out yet. But they can. So thanks for that, I’ve now corrected the article.
You can’t do “after-tax” SEP contributions, but starting this year you could make Roth ones to a Roth subaccount of your SEP IRA. It would take the place of your SEP-IRA contributions, not your IRA/Roth IRA/Backdoor Roth IRA contributions.
Hi,
Thanks so much for all of the help! Really love what you all do!
I am an employed doc and max out 401k. I also do 1099 work on the side. Besides this I am part owner with two others of a small company with no employees and no retirement plan, set up as an llc.
I also do backdoor Roth and hsa for my wife and I.
Would I be able to do a solo 401k for my 1099 income?
If not what is my best option for the additional side income?
Thanks!
Yes, for your 1099 work. Your partnership could also set up a third 401(k) plan.
Can you comment on options for solo 401K investments and accounts upon closing of the business?
If you want to continue doing a Backdoor Roth IRA each year you will need to either convert the entire Solo 401(k) to a Roth IRA or roll it into another 401k or 403b. Otherwise, it can be rolled out into a traditional/rollover IRA.
Excellent explanation.
Thank you for this excellent post — it is so helpful. By the end of the year I will be doing some 1099 call moonlighting for at least two completely unrelated hospitals in addition to my primary W2 gig. Do I need to get two different EIN numbers and set up two solo 401k accounts for each one? Or can I just combine it all together and use one solo 401k since the business is “medicine” for each one? Thanks so much for clarifying
No. Both 1099 “employers” are basically the same job for you. Your business has two clients and one 401(k). More info here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Hi, Jim. This is a great summary of the Solo 401(k) process, which I have been using for years now on your advice, BUT … There is still no mention of the 5500-EZ reporting requirement which just cost me $1,500 (because I didn’t know about it until I’d already been delinquent for 3 years). Please do your loyal followers a favor and let them know about the 5500-EZ before it’s too late for them too!
(Thanks!)
Ok. I’ll try to make sure that is included on EVERY post in which I mention solo 401(k)s because every time I don’t I hear about it.
I suggest you should remind readers that 5500-EZ must be filed when the solo 401k is terminated. The penalties for failure to file seem to be confiscatory.
Just added a paragraph about that to the post.
I was on 1099 up until 2021 and contributed to SEP. Now I am on W2 with a 401k. I am no longer contributing towards SEP. With the Secure Act 2.0, can I do back door Roth IRA or pro-rata rule still apply on my SEP?
The pro-rata rule will still apply to your SEP since the money you have in there currently is tax-deferred. The Secure Act 2.0 provides for Roth contributions in a SEP-IRA in the future, so as long as your SEP IRA balance is all Roth ie. already taxed, it won’t keep you from doing the backdoor Roth IRA. You would still have to either do a Roth conversion with the money you have in the SEP IRA currently or roll it into your new employer’s 401k, if it’s allowed.
I have a PDB with Schwab and a solo 401k with E*Trade. One point I would make is with the PDB, employer contributions to the solo 401k are limited to 6% of net, not 20%. Important to be aware of that.
Yes, DBP contributions can reduce profit sharing. Usually increase overall contributions though.
Absolutely!! Highly recommend the PDB, Schwab does make it relatively easy and it can provide significant tax deductions which may have added benefit of making you eligible for QBI deduction if you make too much to qualify. There are some restrictions and you need to be sure you can make the contributions to satisfy IRS requirements. But the benefits can be enormous.
Hey Jim. I am transitioning from Active Duty Air Force to the Reserves and I’m beginning a new life in the airlines. Airline pay will start off low, but balloon quickly. I’m Married Filing Jointly, and we’ll be in the 22% bracket for the next 2-3 years, but then will move upward. My wife just picked up a new part time 1099 gig doing admin work, and she also has a sizeable Inherited IRA. The Inherited IRA is from before the 2019 SECURE act, so we had been planning to stretch out our withdrawals as long as possible, only taking the RMDs along the way.
We’re going to open up a i401(k) for my wife, and I was thinking about the best way to use the account. The way I’m thinking about it, if we withdraw money from the Inherited IRA, pay the taxes due, and deposit an equal amount as a Roth contribution to her i401(k), that would “lock-in” the taxes due from the inherited IRA into our current bracket. We would be contributing far more to the 401(k) than we normally would by doing this. Am I thinking about that correctly, or am I missing something?
I know lower income years are a good time for Roth conversions, but I believe there isn’t a way to roll-over inherited IRAs. This would be a way to roll it over into a Roth portion of her new i401(k), subject to the limits on contributions you linked to above (https://obliviousinvestor.com/solo-401k-contribution-calculator/)
Thanks!
I think that’s fine to do, just remember that she has to have enough earned income to cover the i401(k) contribution. You’re right that you cannot do a Roth conversion on an inherited IRA. I mean, if you have the cash, continue to stretch that inherited IRA AND make Roth contributions to her i401(k). But if you have to choose then your choice isn’t a bad one.
Hi Jim,
First of all – thanks for everything you do. As a (relatively) young physician learning about financial management, it’s incredible having this trove of knowledge to learn from.
I’m hoping to clarify a few things, specifically about after-tax contributions to a solo 401(k) plan, and hope to use my situation as an example.
Currently, I get both W2 income as well as 1099 income. I live in California, so I am paying out the nose in taxes. My wife gets a 401(k) through her work which we max out and we also max out Backdoor Roth IRAs for both of us each year. We diligently contribute to 529s for our kids. We are looking to open a new brokerage account for additional savings (now that loans, house down payments, etc are all paid off).
For my W2 income, I max out the employee contribution in a tax deferred 401(k) and get the maximum employer match.
For my 1099 income, it has ranged over the last few years to up to as high as $200k, but I forecast it will be closer to the $80k-$100k range for the next couple of years. I have utilized a tax deferred solo 401 (k) through fidelity in years past and placed the maximum 20% of earned income into it each year.
Now, prior to opening a brokerage account, I am thinking it is more worthwhile to maximize a solo 401(k), and the way to do this seems to be after-tax contributions. I imagine I will have to utilize a customized plan (I’ll go through someone on your recommended page) since Fidelity doesn’t offer the after-tax features.
The things I’m not clear on – is it possible to create a tax-deferred solo 401(k) for employer (i.e. me) contributions with the option for after-tax contributions, or are after-tax contributions primarily an option for a Roth solo 401(k)?
If it is possible to create this plan, is there an option to do a Mega Backdoor Roth conversion for the after-tax contributions only (so not the employer contribution/tax-deferred portion), or does everything (all employer contributions + after tax contributions) need to be converted/taxed?
Thanks for your input.
Lief
Yes. You can have a plan that allows tax-deferred employer contributions, employee after-tax contributions, employee tax-deferred contributions, and employee Roth contributions. You don’t HAVE to make tax-deferred employer contributions if you don’t want to. Nor do they have to be as large as you could make them before you can do after-tax contributions. You will need a customized plan. But in the WCI plan, Katie does Roth and after-tax contributions, I do after-tax contributions, and we have employees that just get really large profit-sharing/matching tax-deferred employer contributions.
Hi,
I have recently come across your website and am learning a lot. Thank you! Can you expand on the Secure Act 2.0 rule that applies to over 50 catch up contributions being Roth only? If I sign up for a Solo 401K with Schwab or Fidelity (who do not offer a Roth Solo 401K, would I NOT be able to make the over 50 catch up contribution?
Additional info to above- I make over $145k and income is all 1099.
More info on Secure Act 2.0 here:
https://www.whitecoatinvestor.com/secure-act-2-0/
Here’s the section on that Roth catch-up:
Section 603: Rothification of Catch-Up Contributions for High Earners
No longer will catch-up contributions for high earners ($145,000+, indexed to inflation) be allowed to be tax-deferred, They will have to be Roth contributions. This appears to be driven by a need to increase revenue to the government. Starts in 2024.
So basically by next year all 401(k)s will need to prepared to implement this. Presumably Schwab and Fidelity will change by then, but who knows?
How do I put money into my solo 401k exactly?
I have a W2 job making 100k and a 1099 job making 100k. My W2 employer does not contribute or match anything.
So do I simply contribute my “employee” $20k into my solo 401k as well as another $20k as an employer?
Do I simply transfer the money from my bank into my solo 401k that I recently made on Vanguard? Or do I have to go through my payroll service that I have for my 1099 gig?
Or is there something else I’m missing?
Thank you so much for all what you do. You have been more than an inspiration.
It’s $22.5K for 2023 if you’re under 50, but yea, that’s how it works. You could put $22.5K in there as a Roth or tax-deferred contribution. Then you could put another $20K in as an employer tax-deferred contribution. You could also do another $23.5K as an after-tax employee contribution if you wanted to get you to the $66K limit, but you would want a solo 401(k) that allows that and in plan Roth conversions.
As far as how you do it, yes, you just transfer money from your business bank account. Note that it’s the Vanguard small business website you do this on, not the regular Vanguard account you look at your assets on. No need for a payroll service for this.
Thank you so much for your reply
Personally use Rocketdollar and have no real complaints. All these custom 401k business are quite the racket for the amount they charge initially and in ongoing fees. This may a good ancillary business for WCI as it just involves pushing electronic papers and you get a nice annuity on every customer that is not going to switch.
They’re actually NOT a very profitable product line at all for us, nor do they really charge all that much compared to many competitors. My staff has asked to drop this product line in the past because we’re not sure it brings in enough money to justify the work/staff time spent on it. But I’ve been insistent that we keep it because there is such a need for it. WCI has no ongoing income on this product line (just flat fee ads or an initial affiliate fee from some), although obviously the advertisers do. But the solo 401(k) folks are just a few hundred dollars a year. The ones who do practice plans (for those with employees when DIY is no longer an option) are dramatically cheaper than the crappy competitors who charge an AUM fee AND fill a terrible plan with terrible investments. The list you see on our recommended list is exactly the list we used when we made our own WCI 401(k) once we had employees.
We’ve got plenty of biases at WCI, but not really on this subject.
Hopefully an easy question.
In 2023 I will make about $150,000 from 1099 work. So far, all my previous retirement contributions have been Roth (after SEP IRA conversions). I am over 55 years old. Now that my income has dropped to this level, would like to continue to maximize my Roth contributions. The calculator tool, says I can put $57,800 ($22,500 + 20% + catch-up). Would like to increase this to the maximum possible ($73,500), and make it all Roth each year. Which of the “easy” companies (Vanguard, fidelity, TD etc.) will allow me to do this and can you explain the actual logistics of the steps needed. For example; is it contribute before tax then convert, or contribute Roth for me and before tax for employer (and then convert that amount to a Roth).
None. That’s why I have the list of other companies that will allow you to do a Mega Backdoor Roth IRA.
You can do your employee contribution including catch-up as Roth and then the rest will need to be made as an “after-tax” contribution and then converted to Roth.
I am sole proprietor. I have 1099 income but on my W9 is has my SSN, Am I required to insert the EIN on the W9 (same one as my solo 401k) or is the SSN as is okay?
Thanks!
I’d use the EIN.
Thank you. And it’s okay to use the same EIN that was used to open by Solo 401(k) and put that one on the W9, right? Since, I am a sole proprietor.
Yes.
Ugh, exactly my question, except that I received a 1 time payment and did not use my EIN, but rather my SSN, do you think Im stuck not being able to contribute this year? Thanks
I think you can probably still do it, but I’d try to go back and give your EIN to the person who paid you and see if they can change it to keep everything nice and clean.