By Dr. James M. Dahle, WCI Founder
I'm a huge fan of Solo 401(k)s for self-employed physicians. You can max it out ($52K in 2014) on less income than a SEP-IRA, you can get a Roth option in it, and you can still have Backdoor Roth IRAs on the side. If you're an S Corp, the ability to max out the Solo 401(k) on less income allows you to declare more of your income a dividend (and thus less as salary) saving you even more in Medicare tax. (I wouldn't recommend trying to get your income low enough as a physician that you're going to save any Social Security tax.) The paperwork for establishing and maintaining a Solo 401(k) is slightly more difficult than a SEP-IRA, but still no big deal. Solo 401(k)s also sometimes offer a loan option, like other 401(k)s, but which you cannot get in an IRA, SEP or otherwise.
However, the question of where to open a Solo 401(k) isn't nearly as straightforward. My normal default in questions like these is to go to Vanguard (and I did). However, this decision isn't the “no-brainer” that going to Vanguard usually is. Like the Vanguard brokerage, the Vanguard Solo 401(k) has some issues.
Solo 401(k) Providers
Vanguard
The Vanguard Individual 401(k) offers the Roth 401(k) option and all of the Vanguard mutual funds. However, there is no brokerage option, so buying ETFs, even Vanguard ETFs, and mutual funds from other fund companies isn't an option. You cannot even get Vanguard's less expensive Admiral shares, just the admittedly slightly more expensive investor shares. The Vanguard Individual 401(k) used to not accept incoming IRA rollovers, an important issue if you have a large traditional IRA you would like to rollover to a Solo 401(k) in order to allow Roth IRA contributions through the backdoor. However, in 2021, they started allowing these. There is also no loan option if that is important to you.
Fidelity
The Fidelity Self-Employed 401(k) Plan has a brokerage option (through which you can buy Vanguard and other ETFs) and its low-cost Spartan index funds. However, I have been told it has no Roth option, although the plan document doesn't say that. [Update: Fidelity has confirmed to me that they do not have a Roth option for their individual 401(k).] It does, however, accept incoming rollover IRAs, so this is a great option if you need to do that in order to start doing Backdoor Roth IRAs. Fidelity also offers 401(k) loans. [Update: A reader has assured me that Fidelity most certainly DOES NOT offer 401(k) loans.]
Schwab
The Schwab Individual 401(k) Plan allows you to buy Schwab funds/ETFs for free and Vanguard ETFs for $8.95 per trade. They do not allow loans, but the plan document does state that a Roth option is available. To add to the confusion, the plan document states you CAN take out loans. [Update: A reader called Schwab- the Roth option is not available despite what the plan document says.] It seems to accept 401(k)/403(b)/457 rollovers, but not IRA rollovers. [Update 2/2017: I'm told by readers that Schwab now takes rollovers.]
ETrade
The Etrade Individual 401(k) Plan allows Roth contributions and obviously has a brokerage option with $9.99 trades for any ETF. They accept IRA rollovers and allow for loans. They also will pay you if you transfer your current Solo 401(k) to them, $200 for $25K-$99K, $300 for $100K-$249K, and $600 for a $250K+ plus plan.
TD Ameritrade
The TD Ameritrade Individual 401(k) Plan offers full brokerage services including a number of commission-free ETFs from Vanguard and Ishares. They have less information on the website than the other providers, so I am unsure as to the availability of loans, a Roth option, or whether or not they accept IRA rollovers.
| Vanguard | Fidelity | Schwab | Etrade | TDAmeritrade | |
| Index Funds | Investor Shares | Spartan and ETFs | ETFs | ETFs | ETFs (some commission free) |
| Roth option | Yes | No | No | Yes | ? |
| Loans | No | No | No ? | Yes | ? |
| IRA Rollovers | Yes | Yes | Yes | Yes | ? |
Who Has the Best Solo 401(k)?
There are at least 13 other Solo 401(k) providers, but I'd recommend choosing one of these 5. With recent changes, Vanguard now seems seems like the best overall option to me, but eTrade may be the next best.
If you are looking for more of a self directed 401(k) one option for you could be Rocket Dollar . They administer self-directed Solo 401(k)s and IRAs. Because it’s self-directed, you can buy real estate properties on your own or leverage RE crowdfunding platforms like Equity Multiple, RealtyMogul, Fundrise, Roofstock, CrowdStreet, etc.
What do you think? Where is your Solo 401(k)? Why did you choose that one? Comment below!
Say you are a military physician and contribute the max to your TSP. If you moonlight as an IC can you also open a Solo 401(k)? If so can you max it out or just the difference between the $52k and the $17.5k you put in the TSP?
Is your Solo 401(k) set up as a Roth so that you can do your backdoor conversions? Couldn’t you just have a Roth IRA that will accept rollovers for the purposes of backdoor conversions? Then your Solo 401(k) could be traditional and give you more tax sheltered space.
You can open an individual 401K, and put almost 20% of what you make moonlighting into it. I’d probably make it a Roth Individual 401K if I were in the military, but either would be fine. The main problem with moonlighting in the military is you get pounded with payroll tax since you usually haven’t yet hit the maximum Social Security income limit.
My Individual 401K is traditional to help keep me out of the 33% Federal bracket. 401Ks, unlike SEP-IRAs, aren’t counted in the pro-rata calculation so important with Backdoor Roth IRAs. Roth IRAs can accept Roth rollovers, but if you want to rollover a traditional IRA (for which you actually took a tax deduction at some point) into a Roth IRA, you have to pay taxes on it.
I was just doing some extra reading on Bogleheads. It looks like the employer contribution must be in pre-tax dollars.
I was active duty. You can max the TSP and then open a SEP for your moonlighting.
You cannot put 17500 into TSP and solo401K.
My advice is max the TSP. It is very low cost provider.
Then max your SEP-IRA.
That’s correct that you can only do a single “employee” contribution ($17.5K) no matter how many jobs or 401Ks/SEP-IRAs you have.
I have navigated this from many perspectives.
In 2010 and 2011, I had W2 income as an Active duty Army “employee” with TSP(401K) and 1099 income for moonlighting. I maxed the TSP and was able to max a SEP as well.
In 2012 my income was all 1099 so I opened a solo 401k with Fidelity. I was able to max it with a 17000 “Employee”(salary deferral) contribution and a 33000 “employer”(profit sharing) contribution. It help me save an addional 17000 dollars for retirement that year. I have not done the calculation for this year.
You moonlighted enough to earn $250K+ while in the military? That might be some kind of a record.
Oops.
I meant I put the “max” of 25%.
Sorry. I wish i could have done the Max of max.
Thanks for the summary of what’s available – I tried doing this research myself over the past few months and patched together my own comparison. I ended up going with Vanguard for my Solo401k. It was an easier set-up than I anticipated and I opened it last month. As for my decision to go with Vanguard, I wanted the Roth option and didn’t need the rollover or loan options, so it was therefore a “no-brainer” based on comfort-level/respect for the company.
My biggest regret is that I didn’t open a Solo401k sooner; for me, it’s much preferred over a SEP-IRA because of the higher maximum contributions.
E*Trade’s current bonus cash incentive is indeed tempting. While I didn’t choose them for the new Solo401k, I did opt to move my existing SEP and Roth accounts to E*Trade to avail of that bonus and the initial free trades. I intended to try them out for a while and perhaps later transfer those accounts to Vanguard. So far, I’m very pleased with E*Trade.
It sounds to me like you do need the rollover option if you have a SEP-IRA. You’re missing out on the personal and spousal Backdoor Roth IRA if you have a SEP-IRA.
My Individual 401K is at Vanguard, but unlike you, I actually don’t need the rollover option.
A Solo 401K only allows a higher contribution than a SEP-IRA up to a certain incomes (~$266K for 2013, about $5K higher for 2014). If you make more than that it’s the same maximum ($52K for 2014).
Thanks for your comments. My (faulty??) thinking was that there was no urgency in rolling over my SEP-IRA into a solo 401k – the investments in both accounts are/will be similar – they’ll just be separate accounts until I decide (at some point in the future) to merge them. In the meanwhile, new (employer and employee) contributions will go to the solo 401k exclusively. Am I missing something by keeping these separate?
Frankly, I don’t completely understand the whole backdoor Roth IRA discernment process enough to know if this is something applicable/advantageous for my particular situation, but you’ve got me wondering. My spouse and I contribute the max to our respective Roth IRAs annually, and to our respective 401k plans. I wasn’t aware there was anything else that we could do. Sorry for the possibly ignorant question, but how does having a SEP-IRA make for consideration of a backdoor Roth IRA?
If you are able to max a ROTH annually there is no need for the “back door”. This is just a strategy if you are phased out of the ROTH based on income.
If you’re eligible to make direct Roth IRA contributions, then you don’t need to do the backdoor Roth (nor can you) and can just keep the SEP-IRA. Many, but not all, physicians have too high of an income to make direct Roth IRA contributions. If you’re filing Married Filing Jointly, that limit starts at a modified adjusted gross income of just $181,000. That’s before your itemized deductions.
Thanks.
So I have a full time job at the VA and a part time job as a K1 partner. I contribute the max every year to the TSP 401K (1/2 in roth and 1/2 in traditional) through the VA, and then I put whatever my accountant determines that I can for the K1 partnership job (usually around $10 -12K into my SEP.
But I was thinking of adding to an old ROTH IRA account I have at TD ameritrade through the backdoor roth. I saw that you recommend rolling over any SEP’s into an individual 401K, (so I don’t have to pay the pro-rata tax), which I will do. However, my question is… can I have more than one 401K? I already maximize the government 401K so how can I determine how much I can put in the solo 401K?
Yes.
https://www.whitecoatinvestor.com/multiple-401k-rules/
It’ll be the same amount as you can put in the SEP.
A partner can not adopt a one-participant 401k. Only employers (the partnership) can adopt an employer retirement plan. Your accountant is incompetent. You were never eligible to make SEP IRA contributions from K-1 income. The partnership should have made the contributions to their employer plan before you received that income on your K-1.
It is very unfortunate, but you have a serious problem that requires immediate correction. ALL of your SEP IRA contributions based on K-1 income were excess contributions. You have until 10/15/18 to remove your 2017 SEP IRA contributions and earnings. You will have to file an amended 2017 return and remove the Form 1040 Line 28 deduction for SEP IRA contributions . The earnings will be reported on your 2018 Form 1040 under “other income”. If you have already made 2018 SEP IRA excess contributions, remove them and earnings before the end of the year. Do not claim the deduction and also report the earnings on your 2018 Form 1040 under “other income”.
If you have excess SEP IRA contributions prior to 2017, you have an even bigger mess. These are SEP IRA plan errors and must be corrected under the IRS Employee Plans Compliance Resolution System (EPCRS). These may be correctable under the Self-Correction Program (SCP), which requires no IRS involvement or fees.
You would first need to remove all excess contributions for years earlier than 2017, before the end of this year. The earnings remain. You would then, starting with the first year of excess SEP IRA contributions, file Form 5330 paying the 10% excise tax. This will be an accumulating amount because each subsequent year’s excess SEP IRA contributions would add to the excess contribution balance. You would file a 2017 Form 5330, but that year’s excess SEP IRA contributions would not be added because the were removed prior to 10/15/18. So the 2017 excess contribution balance and excise tax would be the same as 2016. You would file a 2018 Form 5330 to show that all excess contributions have been removed, the excess contribution balance is $0 and there is no excise tax due in 2018 and subsequent years.
I do not feel confident that your CPA has the knowledge or expertise to correct these errors they have caused. I suggest you contact a local employer retirement plan Third Party Administer (TPA) to do this for you.
Do not delay. Do not fail to correct this. There is NO Statute Of Limitations (SOL) on failure to file Form 5330. The excise taxes and any penalties will continue to accumulate indefinitely.
Reference: IRS regulation 26 CFR 1.401-10 – Definitions relating to plans covering self-employed individuals, (e) Definition of employer, (1)
“For purposes of section 401, a sole proprietor is considered to be his own employer, and the partnership is considered to be the employer of each of the partners. Thus, an individual partner is not an employer who may establish a qualified plan with respect to his services to the partnership”
That’s a good point. I missed that. This should be a partnership plan, not an individual plan. Partnerships may be able to have a SEP-IRA, I’d have to look into that, but they usually have 401(k)s.
Could you please elaborate on the issues with the Vanguard brokerage? Thanks.
The Vanguard Solo 401K simply doesn’t offer a brokerage option.
I’ve never used the Vanguard Brokerage, and even with the brokerage I do use (Schwab) I only make about 8 transactions a year. But people who use a lot of ETFs instead of mutual funds occasionally complain about the quality of service at the Vanguard brokerage compared to Fidelity or Schwab.
WCI, is it still true that Vanguard doesn’t offer a brokerage in their solo 401k’s? I recall they started merging accounts or converting them since 2013
Still true. I’d be happy if they’d just give me admiral funds in there.
I’m curious what it is about e-trade that makes it the winner for you? Is it the roth option?
Does the lack of no-fee ETFs weigh into this decision for you? The $9.99 per trade seems significant to me, considering the interest will be pushed to the sweep account and need to be re-invested, incurring the charge each time, as well as for rebalancing.
I know Schwab has a roth option with the K1 group plan I have, but perhaps that doesn’t translate to their solo 401k product.
Roth option, takes rollovers, and allows loans. If you want/need all those features, etrade is the place. Also, even with commissions, you may have lower expenses due to lower cost ETF shares rather than the Vanguard investor shares.
If the Schwab plan has the features you want/need, go for it.
For me, I looked at several: VG, Fid, Schwab, Etrade, TRP.
Fidelity wanted a very large account so they were out.
Vanguard did not allow roll overs from old employed 401k funds, so they were out.
One of them did not allow Roth 401k options and since our employed 401k has roth/nonroth this was a show stopper.
Etrade was the only one that permitted:
401k -trad
401k – Roth
Old 401k rollovers with in-kind securities acceptance. (this took some work, but it’s done.
established 401k-trad to 401k Roth in plan conversions.
has a loan plan (which is a loan to yourself so I’m not sure the advantage but it’s there.)
So, we went with Etrade. It’s not perfect, but so far has been the easiest to work with and set up. We’ll see how they do once I start withdrawing funds.
Are there annual fees with ETrade (outside of fund fees (expense ratios) or other management fees)?
have you tried using your solo401k with ETrade for alternative investments (real estate, etc)?
Any fees with the latter?
Thanks
I have not seen any. There are many mutuals (Vanguard, TRowe, ) that trade commission free as well.
To the best of my knowledge, you cannot use Etrade with alternative investments. I’ve never tried this. There are companies that do “checkbook” Solo-401ks which do allow you to do this.
No, you’d need a self-directed solo 401(k) to do that. I have one now. Fees are a little higher than with eTrade. Hassle is similar. I really need to get another post written about it.
Here’s my two bits. I’ve been with Etrade for ~8 years now. I also have accounts at Merrill and Vanguard. I’ve had accounts at Schwab and TD Ameritrade in the past.
1. Etrade’s i401k allows Roth, loans and accepts rollovers from just about any tax-deferred account (personally, I’ve rolled over an old SEP-IRA, old employer 401k and the lump sum distribution from my Schwab solo-DB).
2. Their NTF ETF selection grows every day and now includes 32 Vanguard and >50 Ishare ETF’s. It seems the NTF options at various brokerages are so dynamic these that it’s not a big consideration to me. Furthermore, it’s irrelevant for the following reason . . .
3. When your account(s) get sufficiently large, you get assigned a personal “financial consultant” and are given special status (i think it’s called Elite or Platinum or something like that). What does that get you? Well, my guy routinely makes sure all transaction fees are refunded. In addition, I am allowed to invest in Vanguard ADMIRAL class funds . . .which is ironic given that you can’t do that in a Vanguard i401k. You get a special 800 number to call and get a real person immediately.
4. I may have just been lucky with the guy they assigned me but the level of customer service is off the chart great.
Now you’ve got me thinking about overcoming my inertia and getting around to closing my VG one and opening an etrade one.
I know you can get VG Admiral shares in your VG 401k now but thought you also might like to know this . . . . By my last count, Etrade now has 155 Vanguard mutual funds (17 Admiral Class funds — all index funds) and 35 Vanguard ETFs transaction free. Use the fund screeners to see the list. Buy/Sell can be done online now . . . no more phone calls! Unfortunately, for two of the funds I use (VMNVX, VHCAX), I still have to call in for trades. My personal rep there tells me it’s part of a bigger plan to attract more RIA business/accounts and there are more changes in the pipeline.
It’s great to see. But I won’t be changing as long as the VG 401(k) is meeting my needs. I’ve been recommending eTrade to people who have a need for an IRA rollover for years.
New Grad/1099 employee with no roll overs needed. Would you recommend eTrade over VG still for the admiral shares?
No, you can get Admiral at Vanguard now. Still can’t do IRA rollovers or a mega backdoor Roth IRA option there of course, at least not without a custom plan. Long as you don’t need either of those, Vanguard is great. I’d still be there if I didn’t need the Mega BD Roth.
Do you happen to know if they accept 401a, 403b, and governmental 457?
I didn’t realize they have NTF/commission free which I see they at least have SWTSX, VWO, VTI, VBR so that’s a nice big chunk there.
The high roller beni’s sound like you’d have everything you’d want at your fingertips for nothing, very compelling.
Thanks!
They have a lot of NTF etfs and the list gets bigger every time I turn around. They also have a bunch of decent NTF mutual funds. You should be able to construct a reasonable portfolio out of the options there without too much effort. I admit I’m a bit out of touch in this regard because I haven’t changed my basic investment strategy for years — which is part of the strategy! . . . “if it ain’t broken” . . .
Apropos to the 401a, 403b, and governmental 457 rollovers, I believe they do but don’t quote me on that. I would call and find out. Or, if you prefer, here’s a handy online tool to help you figure that out: https://us.etrade.com/etx/ris/tools/planoptions
You’re right about the Elite status. The beni’s and hand-holding are great. I haven’t even had to fill out a form in years . . .they do it for me! I’m not really a big shot or a high roller but they sure make me feel like one. . . . I think it’s a smart business strategy.
I’m pretty sure they will accept 403b. I have a TIAA-CREF account from my days at the old U. I asked them specifically about this and I think they said yes. The only reason I didn’t is the TIAA fixed income side is quite flush with 4.875% money and I don’t want to give up the comfort of fixed interest income at the moment. But I am migrating my post univ. 401k as we speak, fund for fund with an in kind transfer.
I just set up my spousal SE-401k and we will be running up the balance soon, as well as giving her a place to roll her old 401k from a former position to get rid of the expense of maintaining that account. So far, I’m pretty pleased with how Etrade has handled things.
An important point to be made about solo 401k is it consists of the employee contribution ( 17,500$) and employer contribution ( 20-25% of profits). Together these cannot exceed 52K$ for one job.
So if you have a regular ( W-2) job, and you contribute 17,500$ to that 401K, which you should especially if you have a employer match.
Then if you have a side job where you are a independent contractor/ buisness owner, you can only contribute the employer contribution ( or 20-25% of profits).
My point being you only have one ” employee contribution” space of 17,500 no matter how many jobs/buisnesses you have
That’s correct, except the employer contribution works out to 18-19% of profits. IRS Pub 560 has a worksheet where you determine your maximum contribution, but it is basically 20% multiplied by the sum of your net profits minus half of your payroll taxes.
So if your side job independent contractor was set up as a sole proprietor can you do the employer contribution or would that be a case for being set up as an LLC or S Corp?
LLC/S Corp/Sole Proprietor has nothing to do with it. You can do the employer contribution for all of those business structures.
LLC does nothing for your taxes or retirement contributions unless you elect to be taxed as an S Corp. An S Corp saves some payroll taxes, but doesn’t provide additional retirement plan options.
If I’m not mistaken, there is a tax advantage to making your 401k contributions as an “employer”.
Sole proprietors/Schedule C: all pension contributions (401k, SEP, SIMPLE) must be entered on 1040, Line 28, NOT Schedule C, Line 19. The net result is that the pension contributions are subject to FICA, self-employment taxes. You do get a little of this back with on 1040, Line 27 but this is a “deduction” NOT a “credit”.
Corporations (S Corp, C Corp, etc.): If you incorporate, all EMPLOYER pension contributions are EXEMPT FROM INCOME AND FICA. These contributions are deducted from your corporate income and never subjected to payroll taxes. The size of this contribution is limited to 25% of your “salary” (W2).
So, from the perspective of minimizing payroll taxes, for the self-employed, it is best to incorporate and maximize EMPLOYER pension contributions and minimize salary deductions (EMPLOYEE contributions).
Obviously, there are a LOT of other factors that go into the sole proprietor/corporation decision . . .
The bigger bang for your buck is the amount of your income that you call distribution instead of salary. You don’t pay payroll taxes on any of that either.
TD Ameritrade allows you to select whether or not you want to allow the ROTH option, Loans, and IRA rollovers in the adoption agreement. For an individual 401(k) plan I typically just set up all three to allow for maximum flexibility. My only disclaimer is this is TDA institutional – I’m not sure the retail side is exactly the same, but I would imagine it is…
Yes, TD Ameritrade allows the ROTH option on the retail side as well. Lots of commission-free ETF’s to choose from on their trading platform. All of my retirement accounts are with TDA, and I have been very happy with their customer support when I’ve needed it.
Via email:
Your link to 13 other Solo 401K providers, links back to AMTD’s page, not a list of 13 other providers. I was going to add PayChex and Employee Fiduciary, but didn’t want to list them if they are on the list you meant to link to.
Adding administrative costs would be a good part of this post also. Set-up and annual fees can add up quickly with some.
Thanks for pointing out the bad link. Here is where it is supposed to go:
http://www.biggerpockets.com/blogs/3441/blog_posts/28085-list-of-solo-401k-providers
I don’t see PayChex or Employee Fiduciary on that list. EF is usually a great option for retirement plans.
I’ll add this little conversation as a comment.
I am in the process of rolling over my SEP IRA to a Solo 401k in Schwab, and in the process get out of my high ER managed fund of funds (thanks for showing me the error of my ways.) I notice you prefer ETFs over vanguard funds. Other than the slightly lower ER, what other benefits do you see with such decision? My plan was to convert everything to a 3 fund plan with the appropriate asset allocation. total stock, international and total bond in a 60/20/20 ratio. I may consider increasing the TBM up to 30%. If feel my biggest hedge is my earning potential and time a still have left in the market. I’m 37
-Thanks
If you are rolling to Schwab you might want to consider using their ETFs to create the three fund portfolio http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs/schwab_etfs/market_cap_index_etfs
The advantage for a long term investor is low expense ratio and no commission. If you use the Vanguard funds inside of Schwab you will pay a high commission (I want to say it is $72 round trip).
If you are set on using Vanguard funds I would suggest looking at opening the account at Vanguard.
I use Vanguard ETFs at my Schwab brokerage in my regular 401K because the commissions are so much lower than Vanguard mutual funds. Since my Individual 401K is at Vanguard, I just buy the funds. I choose purely based on cost and convenience. I prefer funds, but I’m not willing to pay more for them.
Your asset allocation is probably fine, but expect to lose a lot of money in the next bear, perhaps 40% of your portfolio if it is really bad like 2008. If there is even the slightest concern you can’t handle that kind of volatility, then I would suggest a less aggressive portfolio, at least until you pass through your first bear market.
It also looks like TD provides a cash incentive https://www.tdameritrade.com/specialoffer.page When you go to open the account you just have to click all account types.
I mostly use DFA funds on the equity side of things, so I use the 60 days of free trading to establish my positions in mutual funds then manage systematic buys and sells from there, so I rarely pay a ticket charge / commission. I’m not sure if anyone else uses this technique, but I save the $16 commission (negotiated rate) on monthly purchases/sells. On a small account this is critical on a large account everything helps, but becomes less significant.
Good post. Be careful with some of these comparisons. They aren’t apples to apples in the services they offer. For example, EF handles a lot of the paperwork for you, such as the Form 5500. Others do not. For a Solo 401(k), that might be worth saving the money since you don’t have to worry about it being a safe-harbor plan. Make sure you understand what you are not paying for.
If the account is less than $250k a solo(k) is typically exempt from the form 5500 requirement.
Most hospital employed physicians are limited to 401k accounts ($17,500 per year) for the tax deferred accounts, unlike private practice where you can defer up to $52,000 in a 401k/profit sharing plan. Any suggestions, other than back door Roth and stealth IRAs to maximize tax deferred and tax free savings?
You can start a business on the side, either medical or non-medical, or you can lobby the hospital to add another account. A 403B + 457 is a common combination at academic hospitals.
Separate from my employed hospital position.. I give pharma sponsored talks that brings extra income that can range from 2-5k a month. The pharma company send the checks directly to me but I am debating whether it’s worth the time, effort and more importantly money to form a consulting side business? I guess as s corp or llc? I’m new to this thought…
Great website and post, definitely appreciate the information
You already have a side business. It’s called a sole proprietorship. You may wish to become an LLC or corporation for liability reasons (probably not much in your side business) and for tax reasons (if you pay as an S Corp you save on some Medicare taxes).
If I form a s corp.. In addition to saving Medicare taxes.. Can I sock more away to the solo 401 or sep ira ?
I was wondering the same thing.
I’m currently employed (receive W2’s), and contribute $17.5k to my employer’s 401k. If I obtain a steady 1099 income, would a recommended setup be to form an S-corp, and contribute a portion of that income to a Solo 401k up to a max of $52k – $17.5k?
You don’t need the S Corp to get a Solo 401K.
Hi!
So just to make sure I understand — I can open a solo 401(k) if I do not have an EIN number? I do not have an LLC or any other business — I’m a lawyer doing contract work as an independent contractor (will receive 1099 and pay all SS and Medicare) for law firms that include me in their malpractice insurance coverage. I would love to open a solo 401(k) if I can (as opposed to a SEP IRA or SIMPLE IRA). I would appreciate your guidance!
It only take about 3 minutes to get an EIN. Why not get one?
If you’re doing contract work and getting paid on a 1099, you have a business. You are self-employed. By default, you’re a sole proprietorship. But you can get an EIN for that.
But do you HAVE to have an EIN if you are a sole proprietorship and just trying to switch to a solo-401K?
Yes, at least at Vanguard and I think everywhere else. The Vanguard paperwork requires it.
I have used 401kadministrators.com in La Jolla for the past 7 years. Allows investments in Vanguard funds and fees only 0.25%. Allow loans (which I think is useful) up to 50k.
My problem with the 401k at Vanguard was it didn’t allow any employees, even those working less than 1000 hours year i.e. your children.
anyone else use 401kadministrators? Craig sounds like he knows what he is talking about.
Excellent article, Doc! Can you expand a bit on the ‘back door’ Roth – I know you’ve covered it before (and I have a ‘file’ of your previous postings…) – can you even just tell me which previous post/date has that info?
After being an employed physician for 8 years, I find myself self-employed again. Not sure what retirement plan my ‘partners’ have setup – but I’ll be discussing this article with them Monday. Thanks.
I have a tutorial on the backdoor Roth coming up in a couple of weeks. Here’s my main post about it:
https://www.whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
Quick correction. I just did a SEP IRA to solo 401k rollover in Schwab
Do any solo 401ks offer after tax sub-accounts (so you can do the equivalent of a backdoor roth with a 401k)? Not a physician, but I imagine this would be useful as it would require less income to double up on the 415 limit, something that often seems available to physicians.
I don’t know of any that offer after-tax sub-accounts. I’m not sure any 401K can do that if it allows you to exceed the 415 limit. The TSP allows for after-tax contributions while deployed, but as I understand it, only up to the 415 limit total.
Not what I meant. You can take advantage of the 415c limit multiple times by, for example:
1) having your solo 401k for your business and having another practice with partners with it’s own 401k or
2)having your solo 401k for your business + regular employer 401k.
Each gets it’s own 415c limit (http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer&n=78). I think you posted on this before, but I may be misremembering.
For the subaccounts, with 401ks set up the right way (though I have not heard of this offered in solos), you can contribute to the after tax sub-account 100% of your salary up to 52k – in full, min(52k-employee contribution-match, salary-employee contribution-match).
and then do an in-service non-hardship withdrawal to your Roth IRA.
This will allow you to:
1) max out the 52K limit at a significantly lower income. if your income is insufficient to max it out the normal way.
2) take advantage of the 415c limit at employers where your employee + match is under 52K, provided this option is available.
This question is somewhat not related, but I need some advice. I was not in the military, but thanks to my dad I can use USAA. I am still in residency, but changed employers and have a 403b I need to rollover. I was planning to go with USAA, but noticed WCI never mentions them nor seems to use them for financial planning. Is there a reason for this?
USAA is great for insurance and decent for banking. You could roll over to a brokerage and have access to any ETFs or mutual funds, but will pay higher transaction fees to do so. Their own offering of mutual funds is very limited, as are their overall investing options. If you are looking to roll over to an IRA then your best bet is to go with Vanguard.
I use USAA for insurance and banking. I have a home equity loan on my investment property with them. But I agree their investing options are disappointing. For most investing-related stuff, using Vanguard or Fidelity is a far better choice.
I have been with USAA for decades for insurance and banking/brokerage, plus used them once for comprehensive financial planning. What I learned was that their financial planning advice is limited to the products they offer and therefore their financial planning was not helpful to me (i.e.- no mention of solo401Ks because USAA doesn’t offer solo401ks – that was a costly omission in my particular financial situation). My insurance and some banking (credit cards) will stay with USAA, but my investments are now with Vanguard and ETrade.
I have a 403b and 457 account with a $17500 limit for each. That equals $35k. I also get a hospital match of about $10k. Can I start a side consulting business and put in 20% of the income to make my personal contribution $52k or do I have to include the $10k hospital match? It’s a difference of another $17k vs. $7k.
Also can the hospital pay me separately as a consultant if I do non-clinical admin work?
Yes, they can pay you as a separate business “as a consultant” for non-clinical work. If your regular pay is W-2 (employee) they could pay you 1099 (independent contractor) pay as a separate business. You could use your 1099 income to fund a Solo 401K or SEP-IRA with a maximum contribution for 2014 of $52K.
The $52K (2014) limit is per employer. That includes your contribution to a 403B and the match from the employer. So you’re limited to $27.5K at your main job. The 457 is separate. Neither has nothing to do with your Solo 401K at your other job, other than you only get one $17.5K “employee” contribution total no matter how many jobs and 401Ks/403Bs you have, and that is going into your 403B. So you’re limited to 18-19% of your 1099 income up to the $52K limit into a solo 401K/SEP-IRA.
Hi Jim,
I’m meeting with Fidelity this coming week and will get an update on the Roth option. We’d asked them to add it earlier last year and they were working on it. I’ll get a status update posted once I connect with them.
So heres a quick scenario:
Salary: 140k
1099 job: 35k
Tax Rate: 28% Federal, 9.3% State
Age: 33
I placed 30k into a taxable account with vanguard 1/18/14. As of today I made $80. Just learned about individual 401k so now I want to put the money into a individual 401k which I can contribute ~23k. I plan to buy a home in about 3-5 years so I like the idea of the 401k that way I can max it out and not worry about saving as much money for the down payment since if push came to shove I could borrow 50% of what Ive invested (although I am still confused about this possible double taxation concept).
Question:
1) Should I make my solo 401k with Vanguard since I’m already with vanguard and my preferred funds are Vanguard index funds (VTSAX & VTIAX) an then transfer to Etrade when Im ready to take a loan out in 3-5 years? OR Should I invest with ETrade right off the bat (since you cant invest in the low cost admiral shares at vanguard with a solo 401k would the ER actually be lower at ETrade even with the fees since I wont really be trading much but instead only buying VTSAX & VTIAX monthly)?
2) I will have some more money to invest. Since my job offers a 40b I cant get a tax deduction for an IRA so I was going to contribute $5500 max to a traditional IRA then do a backdoor Roth conversion. With any extra money I have after that should I invest/ store it in: a) high yield savings account (Ally 0.85%) b) crappy 403b life insurance annuity with salary job(net expense ratio: 0.93% ER + 1.4% mortality & expense fee = 2.37%) c) mutual fund in a taxable account with Vanguard d) 5 year CD (Barclay 2.15%)
Thank you so much for all your help and I love the blog…
1) You can’t borrow from a Vanguard Solo 401(k). If that is your plan, probably ought to open it elsewhere. You’d want to buy the ETFs at eTrade, not the funds I suspect. Depending on how much you spend on commissions, the commissions may be more money than the lower ER.
2) First set your goals, then your asset allocation, then choose your investments. If it is short term money or needs to be very safe, then MMFs or CDs are appropriate. If it is retirement money, then stocks (probably via a mutual fund) are appropriate.
Even a crappy 403(b) like yours may be worth using if you won’t be at the job very long.
1) I am aware a i401k loan is not an option at vanguard but I could always move it from vanguard to etrade a month before I need the loan. Nevertheless, I looked into this further and it seems with eTrade I could invest in VTI (which is the ETF for VTSMX) and it’s ER is only 0.05% (the same as VTSAX, which is the low-cost admiral version of VTSMX but at vanguard you cannot invest in admiral shares or ETFs within a i401k) thus only by using etrade can someone invest in the Vanguard Total Stock Market Index Fund at an ER of 0.05% In addition, I plan to make a one time annual lump sum contribution to my i401k every year (~$23500 which I would do at the begiunning of each year to max returns) at vanguard I would be charged $20/ year while at etrade I would be charged $9.99/year. Seems like etrade is the way to go right?
Can’t fault your reasoning.
Thanks again for all your help. This blog is priceless.
Questions?
1. Is it 20% of the net income (after expenses) you can contribute or 20% of total income in i401k?
2. When do you contribute? At the end of the year? Because you I don’t know how much will be my income from my side business?
3. If you have 2 different side businesses can you have two different I 401k or is it better to have only one?
1. Net income after business expenses including the business half of payroll taxes. Plus if you have used it already in another 401(k), the $18,500 employee contribution.
2. Anytime during the calendar year. You have a little time after the calendar year too, longer for the employer contribution than the employee contribution.
3. No. If you own both businesses they are considered related and you only get one 401(k) for all of them.
Thanks.
I am a W2 employee and have 403 b in TIAA (With limited employers funds) and also some 401k money in Fidelity from prior employer (Limited fund options again). I am changing jobs and will have new 401 K through employer through blue star retirement (and TD Ameritrade). I also do some consulting work on the side with max money /year 10K. I was thinking on opening a solo 401k and transfer all the money from fidelity and 403 b from current employer to this i 401 k account ( i can have control of all of that) versus to my new employer account versus leaving it in where it is?
What do you recommend? i will really appreciate your help.
Thanks again.
You can roll your old 401k in but I’ll bet your current 403b doesn’t allow in-service rollovers. Most don’t. You’ll have to separate before you can roll it over.
Once you leave your current employment, you should have many options: (a) rollover to an IRA, (b) rollover to Solo 401K, (c) rollover to new employer 401k, or (d) leave the funds in prior employer 401k.
In general, employer 401ks provide the least flexibility and the highest fees (please forgive the generalization). You’ll get the most flexibility with an IRA or Solo 401k.
There are tax regulations governing in-service distributions, which differ for qualified plan types and the nature of the plan contributions, In addition, in most scenarios, the tax code allows Qualified Plans to be drafted such that they are more restrictive than the tax code.
Detailed tax cites for in-service distributions can be found at: https://www.401kcheckbook.com/in-service-distributions-checkbook-control-solo-401k-ira-llc/
If doing a solo 401k as independent contractor, does the employee contribution to the solo 401k have to come out of the income of a 1099. So I one makes only 10k of 1099 income, can you still put in 17k into that account, or are you limits to the 10k (assuming no other outside 401ks).
Your limit is $10K. Sorry.
What happens if one year I decide to stop moonlighting and have no further 1099 income, only W2, would I have to terminate/rollover the solo 401k, or can I keep it but just no longer contribute?
You can just keep it, roll it into another 401(k), roll it into an IRA and convert it to a Roth, or withdraw it, pay the taxes and penalties and spend it.
Thanks for the info. I was afraid I would have to terminate it or roll it over into an IRA if I no longer qualified to for an individual 401k.
I currently have a 401k with an employer but will be transitioning to become a Sole Proprietor soon. I took out a 401k loan through the employer for a first home. Can I roll over the 401k loan along with the rest of my 401k to Solo? I have read conflicting information about whether this is an option.
I do not believe you can roll over a loan. In fact, I think it is quite clear that you have to pay it back rapidly when leaving a job or it is treated as a withdrawal (taxes, penalties, and lost tax-protected space.)
Yes, I left my previous employer and they wasted no time sending me the 1099 for the amount of the loan. If you can, try to pay it off before you leave or ask them how long you have. I think you may have only 60 days.
If you are going to place all your 1099 income into a solo 401k, do you still need to file a quarterly tax filing?
No. If you’re not going to owe any taxes, your estimated taxes are zero. Keep in mind the only way to put all your 1099 income into a Solo 401K is via the employee contribution. So make sure you haven’t done an employee contribution into another 401(k) somewhere because you only get one per year.
Thanks. I have a 401a but my understanding is that doesn’t apply towards 401k limit