By Dr. Jim Dahle, WCI FounderSolo 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!
Hi, I have a quick question. I am a psychiatrist and have S-corp. My wife is also a corporate officer, and is also my practice manager. In order to max out my and my wife’s contributions (including profit sharing part) to my solo 401K account, I will need to increase my wife’s salary. Her salary is currently at $90K. Mine is at $170K. however, by increasing my wife’s salary we are also going to increase her payroll taxes . What is the right balance here? Pay more FICA taxes but also contribute more to the retirement account or keep it at the current level? Thanks for any advice.
Good luck. Let me know if you figure it out! There are a lot of moving parts here between SS taxes, medicare taxes, SS benefits, and additional 401k contributions.
Probably the biggest bang for your buck is getting a customized 401(k) that allows after tax contributions and in plan conversions (the mega Backdoor Roth). That would allow your wife to max out the 401(k) with even less income than $90K, but it wouldn’t be all tax deferre contributions. That’s what we do with Katie’s salary at WCI right now.
Hello,
I max out my 401k at my W2 job ($22,500 as an employee).
Can I contribute towards my Solo 401k (from my 1099 job) as an employer without having a contribution as an employee portion within my solo 401k?
Yes.
Hi Jim, thanks for all you do.
I max out my employee contributions at my full time W2 hospital job and receive employer matching for my 401k. I will also have about $150K in 1099 income (about 120K in profit) for my business, independent PC work this year which is taxed as an S corp. I want to open a solo 401K to minimize my taxes from 1099 income. My accountant says I will need to start payroll within my PC and pay myself from my business, and that in doing so I will not have much to contribute to a solo 401K.
I did not think that I needed start “payroll” in order to contribute to solo 401k. Is this because my PC is taxed as an S corp? Or is she trying to minimize my PC’s tax burden by making me take a salary? So confused. Thanks for any clarity you can offer. !!
Yes, it is because you’re an S corp. An S Corp has employees and their maximum 401k contribution is dependent on their wages (25% of wages paid). No wages = no contribution. But your corporation needs to be paying you wages whether or not you do a solo 401k.
The less salary you pay yourself, the less you’ll pay in Medicare taxes but the less you’ll be able to contribute to a solo 401(k). Plus, you need to pay yourself a “reasonable” salary.
Can I open a solo 401k if I receive K-1s from family partnerships or LLCs for businesses I have invested in?
I’m a little confused about this: “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.”
I’m assuming you’re saying I can’t use a solo 401(k) and fund it with income FROM the K-1, but I wanted to make sure this didn’t mean, “If you receive ANY K-1 income, you cannot use a solo401k at all.”
Thanks!
No, those are passive income and you need earned income to make retirement account contributions.
Hello, just wanted a to follow up on the question above.
Does this mean that if you have both income coming in through a K1 and from a 1099, you are able to open a solo401k but only use the income from the 1099 to fund it?
Specifically, does being a partner in your practice and receiving K1 distributions automatically disqualify you from opening a 401k if you have another source of 1099 income (moonlighting/call/surveys)?
Thanks!
How many partners in the partnership or S Corp sending you the K-1? If many and you don’t own 50%+, then you can use a solo 401k for the 1099 income. If you’re the majority owner of the partnership or S Corp generating the K-1, then the partnership/S Corp and the sole proprietorship are considered to be the same business by the IRS.
What if you are one of two partners, but only a minority owner (~10%)? It sounds like it should be okay to open a solo401k in this situation.
Thanks!
Yes.
For the solo 401k, is it only applicable within the calendar year of 2023 (if I opened it in Dec 2023 -application still pending) and thus I only have from Dec 20th (today) until Dec 31st 2023 aka 11 days to make some income for the 2023 tax year? Or do I have until April 15th 2024 to be able to consider income for the 2023 solo 401k?
No. You can contribute using income made throughout the calendar year. Hopefully you can get it open and funded before year end but it’s not the end of the world if you don’t fund it. You have until tax day to do that now.
Your contributions for 2023 are based on your income for 2023, no matter when you make the contributions.
I had opened a solo 401k last week to as I was fired up about the idea of making additional income via medical surveys. The solo 401k account got approved a few days ago and now I can see it on my Vanguard platform.
However, I unfortunately am not qualifying for any surveys (tried four different sites so far). I only have a week left in 2023 to make some 1099 income, which I don’t see happening. After seeing that I’m not qualifying to take any surveys, I also am thinking this may not be an endeavor I’ll likely make any significant income from.
1) If I’ve made zero 1099 income, can I close this new solo 401k with no consequences?
2) If I again have zero 1099 income, can I leave the solo 401k open on vanguard with no consequences?
3) I also created an EIN to open this solo 401k…any consequences on that end of having this EIN yet no income associated with it?
Thank you.
1. Yes.
2. Yes, at least for a few years.
3. No.
As far as Vanguard and the IRS are concerned, you just haven’t made any money YET. I’d give it a little more time, especially if you’re in one of the “good” specialties for surveys (generally those that prescribe expensive meds like rheum, neuro, onc etc.)
Hi. I currently have an S Corp and do locums hospitalist work at multiple hospitals and get paid as 1099. I am not employed elsewhere. At one of the hospitals, I get paid through a K1 partnership but it goes straight to my S corp account. This job accounts for about 1/3 of my income. I noticed that you stated that people who get paid through K1 are unable to form their own 401ks and should use the partnership’s plan. Am I able to form my own 401k rather than using the one provided by the partnership since I have income coming in from multiple different hospitals?
Thanks in advance.
Yes, but only for the 1099 income, not the K-1 income.
Schwab’s solo 401k plan now allows for Roth contributions. When asked regarding your 2 requirements for the mega backdoor Roth, they responded: “Schwab’s Roth Individual 401(k) plan allows after-tax employee contributions, but does not allow for in-plan Roth conversions. Rollovers to a Roth IRA are allowed by either direct rollover or 60-day rollover, however once rolled over, the funds cannot be rolled back into an employer plan.”
Does this mean they allow the mega backdoor Roth?
Sounds like it to me! Thanks for letting us know.
A bit confused here at your reply – if the plan allows after-tax contributions but does not allow in-plan conversions, then they don’t allow the mega backdoor roth IRA, right? You would need the second component (able to move after-tax dollars to Roth immediately) for it to work.
A mega backdoor Roth consists of two parts:
# 1 After-tax employee contributions. The plan above allows those.
# 2 Some type of Roth conversion, whether in plan OR via rollover into a Roth IRA, which the plan above also allows. So yes, one could do the Mega Backdoor Roth using that plan.
Hope that helps.
“ 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).”
I am a partner (owner) in a private practice and contribute to my private practice 401k. I also moonlight and make 1099 income. Since I own a business with qualifying employees, does that mean I can’t have a solo 401(k) as well? If I can’t do solo 401(k), I guess I could do the SEP IRÁ for my 1099 income? Thank you.
Depends on how much of the business you own. I think 80% is the cut off (don’t quote me, but it’s at least 50%). If you own less than that, then you can go ahead and use a solo 401(k) for your 1099 income. The rules are the same for a SEP.
Hi, Do I use my existing LLC’s EIN to open an I401K? Or, do I need to create a new, separate EIN just for the I401K?
Also, with Schwab, you can snail mail your contributions, or, you can make contributions from a Schwab brokerage account (transfers). Is it OK to make I401K contributions (both employee and employer) from a personal brokerage account?
example – transfer contribution from business bank account to personal brokerage account, then, transfer contribution from personal brokerage account to I401K account.
Yes, just use the existing one.
I wouldn’t make 401(k) contributions from a personal brokerage account. I’d make them from the business checking account.
1) Is there a reason you don’t advise making solo 401k contributions from a personal brokerage account?
Asking as most of the funds are already sitting in the Federal Money Market Fund in my brokerage account at Vanguard. If it’s ill-advised I could move the MMF money into my checking account first, then make the contributions to the solo 401k. Let me know if this is the better way (next time I’ll know to keep the funds to contribute in my checking account).
2) Checking the math for my first ever solo 401k contribution for 2024 if I made $10k so far in 1099 work.
Employer contribution: $2,500
Employee contribution: $10,000
Total contribution: : $12,500 ?
3) Are you supposed to contribute money as you go (each time you receive a paycheck you add the contributions into the solo 401k account accordingly (25% for employer, 100% for employee contributions of what you make)?
1. Feels like mixing personal and business finances which is generally a bad idea.
Do you have separate bank accounts for your business? If not, why not? If so, no, I don’t think going from personal to business checking and then business 401(k) is somehow better than personal to business 401(k). The mistake was putting it in your personal account in the first place. Will the IRS notice/care this time? Probably not. But I wouldn’t make a habit of it.
2. Where are you getting these contribution amounts from? They’re wrong. Your employer tax deferred contribution is limited to around 20% (25% COUNTING the contribution which you aren’t) not 25%. And how are you going to contribute $12,500 when you only made $10,000? That doesn’t even pass the sniff test. Let me introduce you to this excellent calculator from my good friend, the brilliant Mike Piper:
https://obliviousinvestor.com/solo-401k-contribution-calculator/
If you made $10,000 in profit after all business expenses, and didn’t use your employee contribution elsewhere, you can put
An employee contribution of $9,293.52, plus
An employer contribution of $0, plus
A catch-up contribution of $0.
If you already used up your employee contribution in another 401k, you can put in
An employee contribution of $0, plus
An employer contribution of $1,973.22, plus
A catch-up contribution of $0.
Note that if your solo 401k allow a Mega Backdoor Roth IRA option (employee after tax contributions) you may be able to get more in than $1973.
3. You can do it all at once or in chunks as you go. It jus has to be right at the end.
Great to know. I had recently took some side gigs so haven’t make a business checking account yet. Or opened up a solo 401k, this is all new to me.
The Ascensus webiste says 25% : https://www.ascensus.com/solutions/retirement/plans-featuring-vanguard-investments/individual-k/
That is an awesome calculator, thanks!
2. If I wanted to do it in chunks, what amount would I be putting in as the “profit from business” line on the calculator? Will it add up accurately at year end if I just put in the amount of my paycheck each time? (I hope this question makes sense)
It’s 25% counting the contribution. 20% not counting it. Same number.
2. You’re probably guessing a little as you go, then truing it up at the end.
You don’t get paychecks. You’re not an employee. It’s not just what they pay you either. That’s your gross income, not your net income or profit.
I just found out that the office I worked a few locum days for did not actually pay me as a 1099 (even though that is what I requested on my Employee Enrollment Form). So now I am realizing I may not have the ability to open up a solo 401k, which leads me to my actual issue:
I left my previous employer and have until the end of the month to move my 401k funds, approximately $26,000.
1. What would be your recommendation to do with these funds?
Especially taking into consideration I would like to do the Backdoor Roth IRA, that the fees of this previous employer 401k are terrible, I don’t have a new employer 401k to roll into, and that this tax year (2024) will likely be one of my lower earning years as far as my career goes.
2. Is there any legal way for the office I worked the locum days to fix their error and pay me as a 1099? (Unfortunately the “paychecks” with the taxes taken out have been deposited in my bank account).
3. I initially was looking into the solo 401k as I was wondering if the best option would be to roll over the previous employer 401k funds into a solo 401k. Is/was it the best option?
4. How big of a problem/error is it if I’m *not able to open a solo 401k due to this error? (Just want to comprehend the severity of this error)
I only received two paychecks from this locum job, and did find it odd that they took out taxes. I should’ve contacted them after the first paycheck but this being my first “1099” gig I just didn’t have a clue!! Still trying to grasp all the ins-and-outs of being a 1099 employee.
1. You can roll it into your new 401(k), convert it all to a Roth IRA, or get pro-rated on any conversion you’ve already done this year. If you haven’t yet done one, you can delay it to next year to avoid that.
2. Probably. I’d certainly try.
3. Yes, but you have to be self-employed to use a solo 401(k). I guess you could do a few surveys and open one and do the rollover there.
4. Being pro-rated on a Roth conversion isn’t the end of the world.
1. So just to confirm a solo 401k is absolutely the best place to put the old 401k funds?
(I don’t have a new employer 401k yet)
2. Is there a minimum amount you have to make as a 1099 employee to open a solo 401k? I can’t peg it but I feel like I read something somewhere about an amount of $600…
I just remembered that the office still has about $100 pending to pay me. The deal was that they would pay the minimum per diem rate then pay anything produced over that, after a few months once the claims get processed. It’s been a few months. I could also reach out and have them pay me the difference as a 1099.
3. Would the second best option be converting it into my Roth IRA? Is it a close second? Enough to not go down the path of having the office correct the pay errors…
1. If you qualify to have one it helps you avoid the pro-rata issue with the Backdoor Roth IRA process.
2. No. It is supposed to be a “real business” but there is no definition of that. I’ve never heard of $600 in connection with that.
3. Do you have the money to pay the taxes on the conversion? If so that is often a great option.
I realized I will likely be picking up more temp work in Nov and Dec.
1. Given that I’ll pick up more 1099 work by the end of 2024, is it legitimate (in addition with the survey income), to open up a solo 401k *right now* (prior to end of Oct)?
2. Any preference between solo 401k at Fidelity vs Schwab?
3. Say I stop 1099 work in 2025 and beyond, will there be any issue with having a solo 401k open or can this account hypothetically just sit until retirement with zero consequences?
4. And if there is another need to transfer future 401k employer funds can I still add to this fund even if in future years there is no 1099 income?
5. If standard deduction is $14,600 and the amount of 1099 income annually will be that or less (as a side gig), is there any benefit of seeking out locum work to have 1099 income (vs say working a bit more as a W2)?
Thanks so much for all your help. Just trying to get a grasp of all this!
1. Yes. Nobody really cares when in the year you make contributions so long as they’re justified by year end.
2. I wouldn’t do either right now, I’d get a customized one from one of these folks: https://www.whitecoatinvestor.com/retirementaccounts/ If you really want a free one, then go with whichever one already has some of your accounts. I have a very slight preference for Fidelity over Schwab.
3. I don’t think there is a law about this, but most businesses get rid of their 401(k) when the business is closed. But a business doesn’t have to make money every year. I don’t think the IRS watches any of this very closely though to be honest.
4. You mean do a rollover into it? Yes. Make a contribution? No.
5. This question makes no sense to me. Standard deduction is applied to your entire adjusted gross income to get your taxable income. So no particular advantage of 1099 income over W-2 income in that respect.
1. What the reason you wouldn’t elect Fidelity or Schwab at this time (and recommend a custom one instead)?
Asking as I’m a bit intimidated at this time to pay for a custom one (as I don’t know how much I’ll really make with 1099 income in the future). However I did want to double check as it’s a decent amoutn ($26,000) I’m wanting to roll over to the solo 401k (and possibly may need to add to this account in the future if I ever change jobs/need to move another employer 401k).
2. You previously mentioned creating a business bank account. Is this so my 1099 income can be direct deposited into this account? (and W2 income should still go into personal checking account)?
3. Or did you mean just opening up a business credit card? (For tracking business related expenses)
4. Do you have any business checking accounts and credit cards you recommend?
Thank you.
1. Discussed here: https://www.whitecoatinvestor.com/ascensus-buys-vanguard-small-business-division/ But basically, it’s so cheap to get all the features you can get in a 401(k), I think it’s worth paying a little to get them. Things like MBDR contributions that aren’t typically available with the cookie cutter plans at Schwab, Fidelity, and up until the change, Vanguard. But if you want free, you can still get it at Fidelity and Schwab.
2. Yes, that’s how I’d split it up. Keep your business finances separate.
3. If you need to put business expenses on a credit card, get a business card and use it and only it for business expenses. Separate your business and personal finances.
4. I’d open the business account at the same bank as my personal account probably. Business credit cards usually offer less in the way of rewards compared to personal, but they still usually offer something. Our credit cards page:
https://www.whitecoatinvestor.com/best-credit-cards-for-doctors/
lists the business platinum card from American Express and the Ink Business Cash card right now. If you click through the business card link there you’ll see more including some Capital One Spark cards. I suspect one or any of those would work fine for you.
Fantastic article, thank you.
1. Clarifying, you previously mentioned you had a slight preference for Fidelity, but in the article it mentions Schwab might be best since it added the Roth contribution feature? Still vote Fidelity over Schwab?
2. I hear you and do think I’ll eventually get to a paid custom solo 401k. Right now I’m just trying to cover the very basics as I learn everything…so I thought I’d start with the free one to start simple. IF/when in the near future I do want to shift to a paid custom solo 401k plan, is it pretty straightforward (with no dire consequences) to move from the Fidelity or Schwab solo 401k to the custom?
3. Once I choose Fidelity/Schwab is the process pretty simple to roll over the funds directly from my previous employer 401k account? Do I contact Fidelity/Schwab and ask them to initiate the rollover?
4. I have about two weeks (until the end of the 60 day deadline that I just found out about) to complete the process from opening the solo 401k to rolling over the funds from my previous employer 401k, is this plenty of time to do it all? Wondering how frantic I need to be.
Thanks for your help, would be stuck without!
I’m been reading on the WCI forum and had some more questions. But I might be getting confused so double checking a few things.
My work is exactly the same type of work for W2 and 1099 (unlike some of the commenters on the forum).
5. If my income ratio is say $200k W2, say $10k 1099, do I need to calculate/prorate my deductions for 1099 off this ratio? OR, can I just deduct everything (from 1099 income) as the work is the same for both? Example, if I purchase a laptop to use at both work places…can I deduct the full amount of the laptop from my 1099 income?
6. Obviously the 10k isn’t much. If my deductions surpass (say it’s 15k for the year) the 10k number, can I only actually deduct as much as I’ve earned from 1099 aka deduct up to 10k?
7. You mentioned the $14.6k standard deduction is taken off the entire AGI. So if there is say $10k worth of deductions as a “business expense”, does having 1099 income (say income of $10k ish to continue the example) allow an *additional $10k worth of deductions on top of the standard deduction? Hope this question makes sense.
1. As I think I mentioned earlier, I wouldn’t do either. I’d get a customized plan. But we have an HSA and two 401(k)s at Fidelity and only one 401(k) and a DBP at Schwab. I like Fidelity’s interface slightly better. But if Roth is important to you, you’re not willing to pay for a customized plan, and Fidelity won’t give you Roth, then sure, go with Schwab. There’s nothing wrong with Schwab and my preference is very slight and made about general usage, not specifically about solo 401(k)s. I think a solo 401k is worth paying for now that I’ve had both free ones and customized ones. I mean, our advertisers doing these charge like $525 to set it up and $125 a year to maintain it. And I can put $69K into it and so can my wife. $125 a year. People who complain about that are the people who avoid Vanguard funds and get Fidelity zero funds because the Vanguard funds charge ERs of 0.03%. $125 is 0.09% of $140K and 0.13% of $1 million.
2. The simple way to start is to get help, not to do it on your own to save $125 a year. If you’re planning on customized eventually, just do it now. Here are the people who help:
https://www.whitecoatinvestor.com/retirementaccounts/
Scroll down to Self-Directed/Customized Individual 401(k) and Self-Directed IRA Providers
3. I don’t think it’s terrible, but haven’t done it at either place. Yes, start with the destination.
4. Oh you’ve got a real problem. I hope you can pull this off. Two weeks is nothing in the 401k rollover world. Most will take longer. Maybe even more reason to get a pro to help today. That 60 day deadline is only for money you have sitting in your hands though. Is the money still at the old 401k? If so, I don’t think you’re under the gun any more than the usual fact that the year ends in 2 1/2 months.
You are getting me convinced regarding the customized solo 401k…you made great points. I think my only hesitancy is if I too in my exact circumstances would actually benefit and thus offset the (perhaps for some, relatively minute costs).
*Atm I just need to have a place to roll over $26k of 401k money, but uncertain how much more I’ll actually be able to contribute to this solo 401k in the future, ie., my 1099 income will likely be insignificant to possibly none). The only reason I have 1099 work now is because I’m in-between jobs, but likely will be mostly if not all W2 in the future.
So in my particular situation, do you still recommend the custom plan at this time? I guess I’m curious how I would benefit. Is the $125 annual fee for actively managing the investments??
This is all coming from the perspective of a recent grad, still deep in debt, and so even $500 initiation fee plus $125 feels a bit daunting (hopefully one day it won’t). That being said, if you still very highly recommend a custom plan, I will do it as you give great advice and I probably don’t even know what I don’t know.
I should ask though, I looked into mysolo401.net…it sounds like I have to send checks to invest?? Is this common? I’m a bit baffled and a bit nervous about sending checks in the mail…
I so appreciate that you not only answer questions, but are somehow able to add in additional info that are lifesaving and actually *more important than the questions themselves….
Exhibit A: I had it completely wrong, I thought it was 60 days since leaving the employer I had to do something with my 401k, so PHEW. Glad I have more time. Is your point also that I do need to take action by the end of the year? The employer 401k has terrible fees, so that would be the only reason to get a move-on now that you clarified what I didn’t know.
Well, $500 is a lot for just $26,000 in there. If it’s not a 401k you’re really using going forward, then maybe a free cookie cutter plan is the best choice for you.
Why don’t you just put your $26K rollover into your previous, current, or future workplace 401(k)? That’s even less hassle than messing with a solo 401(k) of any kind.
We previously had a solo 401k through mysolo401k.net. It’s been a while but I’m pretty sure we didn’t have to send in checks for every contribution. I’d double check that with them.
Why don’t you just leave your 401k where it is for now and as soon as you qualify at your new place in 10 months or whatever, roll that $26K in there? Then you can still do your Backdoor Roth IRA no problem and you don’t have to mess with any other accounts. As a new grad, surely you’ve got plenty of uses for any money you earn 1099ing in the meantime.
Even if fees are terrible, how much will you pay in extra fees on $26K in just 10 months? Probably not enough to be worth either of our time to still be talking about this, no?
Okay, all fantastic points. You’ve really helped me navigate this-I went from panic/sheer terror to a whole lotta peace knowing I have way more reasonable options than I thought.
My final q’s (on 1099 but I’ll keep in this thread in case it helps connect the pieces for others with similar questions/circumstances):
I’m been reading in depth on the WCI blogs/forum regarding 1099 income.
My work is exactly the same type of work for W2 and 1099 (unlike some of the commenters on the forum). So I wanted to double check a few things.
1. If my income ratio is say $200k W2, and say $10k 1099, do I need to calculate/prorate my deductions for 1099 off this ratio? OR, can I just deduct everything (from 1099 income) as the work is the same for both? Example, if I purchase a laptop to use at both work places…can I deduct the full amount of the laptop from my 1099 income?
2. Obviously 10k isn’t much (relatively). If my deductions surpass (say it’s 15k for the year) the 10k number (I’ve earned), can I only actually deduct as much as I’ve earned from 1099 aka deduct up to 10k?
3. You mentioned the $14.6k standard deduction is taken off the entire AGI. So if there is say $10k worth of deductions as a “business expense”, does having 1099 income (say income of $10k to continue the example) allow an *additional $10k worth of deductions on top of the standard deduction? Hope this question makes sense. And I could just be completely off in how I’m understanding this.
4. Basically I’m trying to comprehend how a small 1099 income could be beneficial in the big picture for my case and if I really should focus on incorporating it into my financial life (since I have the opportunity). Especially if I plan to max out my employee contribution for W2 job (at least if that’s what’s recommended when you also have the solo 401k option)…
Thanks again for what you do. Your help and guidance have been immeasurable. Also for being kind to those (like myself) who are just getting started and know literally nothing.
1. Yes, it’s supposed to be pro-rated. My impression is there’s a lot of people who get away with not doing so to they point where they recommend that approach to others. When I run into issues like that I ask myself what my integrity is worth.
2. Schedule C can have a negative number at the bottom and so can schedule 1 and thus line 8 on the 1040. If you lost $5K on your business, you can subtract that from other income. Be aware if you do this year after year the IRS is eventually going to reclassify your business as a hobby and disallow those losses.
3. Business expense deductions come off long before you get to standard or itemized deductions. Yes, you get both.
4. No, a tiny 1099 income is not particularly useful for anything and anyone who tells you otherwise doesn’t understand the tax code. I guess it allows you to open a solo 401k that you could roll a big IRA into so you could do backdoor Roths. That’s about it.
All fantastic points and thanks for keeping the ethical line clear-good to get advice as such.
I just thought of something. If my W2 job ended, and for the rest of the year 1099 income will be the ONLY source of income, does that mean deducting business expenses that occured during the time of SOLELY having 1099 income, from the 1099 income, will be 100% appropriate and ethical?
Slightly gray, but I tend to call the gray areas in my favor. I wouldn’t be surprised to hear an auditor say “no, we look at it all year by year.”
Is there any guidance on when you can make profit sharing contributions to your solo401k if you are an LLC taxed as an S Corp? Previously I was just a sole prop and would do quarterly profit sharing contributions. My CPA told me that I need to wait and do a one time profit sharing contribution after the end of the fiscal year (which would mean waiting until Jan 2025 to contribute the $46k to max my solo 401k). I would rather not wait all year before making this one large lump sum contribution in January but I cannot find any good information online pertaining to how early you can contribute this profit share. The only dates I can find are about making your contributions before the business tax filing date.
I think you could do it January 1st of the current year (i.e. your accountant is wrong). In fact, this is what we do at WCI which is an LLC taxed as an S Corp. The tricky part is knowing exactly how much you’ll make and thus qualify to contribute. Probably better to wait than to have to go back and correct an overcontribution. But if you know you’ll make enough to max it out, you should be able to do it very early in the year. We generally do ours in January or February. Might be March this year. But certainly not January of next year.
That makes sense. I should be making $400k this year 1099 and was planning on paying myself around $200k in wages (which is fairly close income for full time W2 employee in my field) to ensure I pay myself enough salary to max the solo 401k. So I feel pretty confident I will make enough to max it out. Thanks for the insight!
I have an additional question related to this topic, as my understanding is you can contribute to employer or profit sharing contributions of a solo 401k anytime during the year you have 1099 income and don’t have to wait until the end of year. Assuming you have made enough and are able to accurately estimate what you’ll make.
1. However, what if you contributed early in year and you have estimated wrong and ended up over contributing for the employer portion of your Solo 401k. I assume there is a penalty for that?
You have an excess contribution and need to withdraw it, paying taxes on any gains.
Does having an S Corp vs sole prop change how/when you can make after tax contributions during the year?
If you know you’re going to earn $70k in 1099 but it will be spread out through the year, do you have to wait until you’ve earned the $70k to make the actual after tax contribution? (My understanding was yes, like taxes are pay as you go).
Or can you actually make the $70k after tax contribution in January of that year even though the income may not come in until later that year?
Well, if it’s an S Corp you have to make sure you pay yourself enough as salary to make those contributions. But that’s the only difference. I see little point in an S Corp for a business that makes $70K.
And no, the IRS only looks at the year end totals of what you earn and what you contribute. You can contribute the money before you earn it so long as you earn enough that year to “cover” the contribution. But you may not want to just in case you don’t actually earn it. That would be a mess to clean up.
Is anyone offering a SEP Roth IRA or a Solo Roth 401(k) at this time (March 2024) for 2023 contributions. Both Fidelity & Vanguard don’t seem to offer the Roth options. Thanks.
Not that I’ve seen yet on the SEP Roth. You should be able to do a solo 401(k) but I can’t say I’ve met anyone who has done it yet. Just because it’s allowed by law doesn’t mean providers have to offer it.
I contribute the max to a W-2 employer’s 401K (Banner health care) but have an unrelated side gig (ergonomic/physical therapy advice at a factory) where I make about 30K/yr. From reading your website and looking at the recommended custom solo 401K websites I believe I can open a custom solo 401K and use the after tax contributions to do a MBDR (meg back door roth).
1st question: I’m not sure if I have to max out the employer contributions or can just do everything as after tax contributions for the MBDR?
Other details: I have a $300K+ standard rollover IRA at Vanguard that I think I will need to roll into my employer’s 401K (at Fidelity – I called them and they said my employers 401K plan will accept the money) to avoid the pro rata issue.
2nd question: If I do that transfer in May 2024 (so I only have a Roth IRA and an employer’s 401K and a custom solo 401K that I would open up to do the MBDR) can I still do the above described MBDR with after tax contributions for the 2024 tax year? Or do I have to wait another year…. to avoid the pro rata issue….?
(I would make the contributions in January/February of 2025 for the 2024 tax year to get the final numbers exact)
Thank you
1. You can do all after tax.
Why not roll the IRA into your solo 401(k)? But there is no pro-rata issue for the MBDR, that’s just for the Backdoor Roth IRA.
2. N/A. No pro-rata issue.
Hello
I was wondering as a sole proprietor of a 401k I want to do the following for say age <50
Contribute employee and employer max to 401k
Do a voluntary aftertax contribution to the 401k that is post tax? Is this legit? For example I don't make enough to get to the max amount of money to contribute to a 401k but after I contribute what I can I can actually contribute more as post tax?
I saw this in this video? Not sure.. If I do this then is this post tax earnings? Would I need to do a roth conversion on this then? Seems like a better way to save more money?
https://www.youtube.com/watch?v=QtCUi0XoceU
Not sure if etrade, vanguard or fidelity will allow this?
Thanks
Yes. you can contribute more as employee post-tax contributions than employer pre-tax contributions on the same income. You would then want to do a Roth conversion on it. The standard cookie cutter plans don’t allow the Mega Backdoor Roth IRA process. You’ll need a customized plan.
Hello
I assume you mean not one at etrade, vanguard, or fidelity.
I was wondering lets say I make 100K net profit and I am under age 50 for 2024 that $23,000 employee and 9,293.52 pretax employer. I want to now put in $69000-$32,293 or $36707 that I can put in as a voluntary post tax contribution. If I put that say in a cookie cutter plan like etrade or fidelity then maybe they don’t allow me to do the back door Roth so my earnings do not grow tax free but I still can put more money in to the max is the correct? I did not know about this trick what is so special about you put this through your taxes, you now have to say 32293 is now post tax money? I wonder how one reports that on the tax return. I this is in addition to the 6000 I can put into a traditional IRA post tax each year. It would seem that I can put more than 23K in employee contributions per year as long as the excess remains as post tax contributions correct? I wonder how the brokerage like etrade for example would keep track of this?
Thank you
The issue is they don’t let you put in employee after-tax contributions not that they don’t let you convert it afterward. 2 steps to the process.
https://www.whitecoatinvestor.com/mega-roth-conversion/
https://www.whitecoatinvestor.com/multiple-401k-rules/
You just put in the 1099R as instructed or let your accountant handle it.
1. Is it best to still minimize the salary you pay yourself as low as reasonably possible as a single owner S-corp if it means you are reducing your employer 401k contributions? Not sure how the math works on this for net tax savings. I am projected to make about 180k this year in the S-corp and have maxed out employee contribution already in another W2 job.
2. Do you feel calculating the max contribution amount is more of a CPA question or financial planner question. My CPA is saying financial advisor and saying he can’t help.
Well, # 1 it has to be reasonable. But within the realm of reasonable, it is simply a matter of balancing three things:
# 1 How much is paid in SS and Medicare tax (the whole point of an S Corp, but saving on SS if possible is much bigger than Medicare)
# 2 How much can be put in the 401(k) (although if doing Mega Backdoor Roth contributions, you need much less salary)
# 3 Possibly the 199A deduction (schedule to go away after 2025)
However, you’re talking about a W-2 job. W-2 jobs don’t mix well with S Corps at all because you have to pay the employer half of SS tax again. You might be better off with sole proprietorship than an S Corp.
https://www.whitecoatinvestor.com/why-an-s-corp-doesnt-mix-well-with-a-w-2-job/
Im just starting to get 1099 income from a side job at work. If it’s 5-10K this year only, is it still worth it to open a LLC/solo 401K in California? My primary job is W2 of course. Thoughts on small side hustles appreciated. Love this post BTW. I guess I have to go back and give them my EIN instead of SSN too.
It’d be worth it to me, but obviously the more you make and contribute the more it is worth it.
Do you recommend the Ascensus company for opening a solo 401k ? (Since Vanguard themselves don’t offer this anymore)
Or is there another company you’d recommend using for a solo 401k…I do have everything else with Vanguard (Brokerage, Roth IRA).
I’ve heard too many complaints about Ascensus now. You can read some of them here in the comments:
https://www.whitecoatinvestor.com/ascensus-buys-vanguard-small-business-division/
If you must have a free one, try Schwab or Fidelity. But I think the best thing to do now for most is to just pay for a customized one from one of these folks:
https://www.whitecoatinvestor.com/retirementaccounts/
A nice self-directed, customized solo 401k is very cheap and just dramatically better if you ever want to do anything semi unique with it like MBDR contributions.
I am w2 employee and max out 403b (with match). I’ll have some nominal 1099 income from expert witness review and insurance quality meetings. Total may be around 4k. My wife, also an employed physician (maxes 401k with match), will have about 1k in 1099 income from teaching. We file jointly. We also do backdoor roths.
Can I open a solo 401k for employer contributions for our 1099 income? Can I include my wife’s income if I open the account? Or would she need her own solo 401k? Do I have to start an LLC instead if I really want to open solo 401k? I understand the total amount is small and maybe not worth the hassle.
Yes you can. The question is should you. Is it worth the hassle for the small amount you’ll be putting in there?
If there is just one business then you guys can use the same solo 401k. I think you could probably justify it as one business.
You don’t have to have an LLC, just an EIN, to open a solo 401k.
I am confused about my current situation. In brief, I had a SEP IRA with a prior moonlighting gig, before starting a W2 job. I also have been with Vituity recently and get a K1 from them. My CPA has been telling me to contribute to my SEP IRA still from the Vituity income. I am not sure if this is allowed however since Vituity has its own 401k plan. Or is there something unique with Vituity that I could potentially change my SEP IRA to a solo 401k? Thank you.
Partnerships must have their own plan and that’s the only one partners can use for that income. You can’t use a SEP-IRA or solo 401(k) with partnership (K1) income. Sorry.
Thank you for your response. I am quite puzzled, my CPA, who works with hundreds of physicians, is telling me I am wrong about this.
They state the SEP I have is not an IRA and more of a pension plan and that I can use my Vituity income to contribute to it somehow. Either way, I think I may consult another CPA then and roll my SEP into the Vituity 401k plan instead for the pro rata rules.
Do they have more information than you’re giving me? Because it seems an open-shut case from what I know. If it wasn’t, every physician partner out there would have their own solo 401(k) and hose all the partnership’s employees.
Just wanted to see if someone could double check the math before contributing to a the solo 401k the first time. I did this using Mike Piper’s Solo 401k Calc.
2024
W2 income: $277, 940.56
401k Employee contributions: $15, 923.16
1099 income: $7,500
1. Does this look correct? SOLO 401k EMPLOYEE contribution of $7,076. 84
2. I just worked three days as a 1099 in 2024, and don’t plan to do much more than a few days of 1099 work in 2025 onward. I did use my SSN for my W9 and to open the solo 401k. Is this fine given my situation? (Just curious when an EIN is more pertinent to use, I’m assuming for those with a larger history of 1099 work/income. I did not open a business account for this due to the limited nature of the work.)
Just wanted to make sure I’m not missing anything. It seems straightforward…but wanted to double check.
Thank you!
Great post and thank you for all you do!
I opened a solo 401(k) with Fidelity (cookie-cutter version) since I don’t plan to do MBDR conversions in the near future and already have almost all of my other investments with them. I have been putting employer contributions into it from 1099 extra shifts (calculated using the amazing Mike Piper’s calculator you suggested). I just rolled over an old W2 job-related 401(k) which has money from my most recent job as well as an old job’s 403(b) rollover (including my contributions, employer contributions, and earnings) and Fidelity asked me to provide a letter stating that “I as the plan administrator of the 401k plan authorize this rollover into the plan and acknowledge that I am responsible for the record keeping.”
What do I actually need to do in terms of record keeping? I already keep track of my own 1099 employer contributions and can keep track of this rollover event on a spreadsheet, do I need to detail anything else? For example, do I need to keep detailed track of what/when were my old 401(k)/403(b) employee contributions, previous employer match/contributions, earnings, etc? Or anything else? I also know I’ll eventually need to file 5500-EZ.
Thanks!
If you know how much is tax deferred, Roth, and after-tax, that seems like all you would need to know. I can’t think of anything else you’d need to do as a record keeper but this may be one of those reasons that “spiritrider” on the WCI forum advises against anyone being their own TPA, recordkeeper etc.
Personally, I’d give them the letter and then quit worrying about it.
The old account had a tax deferred and Roth components, and they actually didn’t allow the Roth component to be rolled over to their self-directed aka solo 401(k), only the tax deferred one (I rolled over the Roth component to my Roth IRA). jfoxcpacfp (whose input I really respect and appreciate) actually had the same advice as you pointed spiritrider seems to have… I guess for now I’ll keep things simple and not worry too much about it. Thanks!
Sounds like you’re set to me.
A few comments on this thread have asked about this but I don’t see a clear answer. If you have $ in a solo 401k and completely stop earning any/all 1099 and sole proprietorship income (i.e. close LLC), do you have to close the solo 401k and transfer the $ to another account? Is there any option for this other than a traditional IRA?
No. Companies are allowed to stop having profit without having to immediately shut down their 401(k)s. In fact, 401(k)s can be kept open for many years afterward.
If you do choose to close it, that money can be rolled into an ERISA 401(k), a solo 401(k), or an IRA.
Hi Jim. I saw that you once had a Solo401k through MySolo401k. I am in the process of opening an account. However, I am confused about how to open up a bank account to hold the funds. Did you use Ally? Vanguard? Something else? Is this just a regular account, or does it need to be a “Trust Checking account”? Thank you for all your help.
Not sure what you mean by a bank account. Doesn’t your company already have a bank account?
Good AM! Semi-retired with part-time W-2 income . . . Wife employed full-time all W-2 income . . . Most $$$ in roll-over pre-tax IRA’s . . . Would like to roll pre-tax IRA $$$ ( subject to annual earned income limit calculation ) into solo 401k to enable borrowing against these investment $$$ without selling / taking distribution / triggering taxable events . . .Please clarify if I can be considered “self-employed”, thus making me eligible to open a solo 401k . . . Your guidance will be most appreciated. . . Enjoy your day!
You can only borrow $50K against a 401(k), but yea, I guess you could do that.
But I don’t know if you have any self employment income. Do you?
Hi WCI,
Schwab now allows Roth employer individual 401(k) contributions. Any thoughts on going this route? Thanks in advance.
Cool. About time. But whether to use it or not is the same as any other Roth vs traditional contribution or conversion decision.
https://www.whitecoatinvestor.com/roth-contribution-or-conversion/