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
- High contribution limits
- Broad investment options
- Roth contribution options
- Catch-up contributions
- After-tax contributions, plus in-plan conversions
- 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:
- 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+)  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
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 .
The second is that SEP-IRAs count, up until 2024, 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 2024, 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, 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 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.
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 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 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 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 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 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.
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 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
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.
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!