I'm a huge fan of Solo 401Ks 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 401K 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 401K is slightly more difficult than a SEP-IRA, but still no big deal. Solo 401Ks also sometimes offer a loan option, like other 401Ks, but which you cannot get in an IRA, SEP or otherwise.
However, the question of where to open a Solo 401K 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 401K has some issues.
Solo 401k Providers
Vanguard
The Vanguard Individual 401K offers the Roth 401K 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 401K 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 401K 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 401K 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 401K loans [Update: A reader has assured me that Fidelity most certainly DOES NOT offer 401(k) loans.]Schwab
The Schwab Individual 401K 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 401K/403B/457 rollovers, but not IRA rollovers. [Update 2/2017: I'm told by readers that Schwab now takes rollovers.]
ETrade
The Etrade Individual 401K 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 401K to them, $200 for $25K-$99K, $300 for $100K-$249K, and $600 for a $250K+ plus plan.
TD Ameritrade
The TD Ameritrade Individual 401K 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 401k?
There are at least 13 other Solo 401K 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 eTrae 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 401K? Why did you choose that one? Comment below!
FYI, Fidelity most definitely does NOT offer loans on their Solo 401K
Thank you for the update. Irritating how difficult it is to get this information right the first time.
But thanks so much for the article – it’s been really useful, and I’m in the process of starting a 401k with E-trade thanks to (in part) info from here.
Very interesting thread — particularly the parts above about not needing an s-corp to get an individual 401k.
I have additional side income from non-medical consulting, about $7500/yr. My wife has similar setup, for a total of about $15k per year. I am a solo practitioner with 2-3 employees and am in the process of setting up a retirement account. My marginal tax rate is around 38% (thank you, California).
My plan was to set up a SIMPLE IRA for my medical practice and contribute max 12k, plus the 3% match. I chose this over a 401k because of the administrative costs of $2-3k for setup and administration plus fiduciary duty. She has a 403b which we are planning to max out. I was then planning to set up Consulting, LLC to run our consulting income through so that we could get more “employer” match.
If we were to form the consulting corp in which we were both partners, it would receive about $15k in income. We would have $800 in corp taxes and maybe $400 or so in accountant fees. This would yield $13,800 in remaining funds. If we set up an individual 401k, had the company contributes the maximum 25% or $3,450 in retirement and we deferred 100% of our income from our salaries of $5,175 each ($10,350 collectively), then we would gain access to an additional $3,450 collectively in tax protected space. We would have to reduce our own personal “main job” tax-deferred retirement account contributions ($17,500-$5,175=12,325 for her in her 403b and $12,000-5,175 = 6,825 for me in the SIMPLE IRA), but our total personal contributions would remain the same at $17.5k between all retirement accounts, my personal company match would be the same at 3% (she does not have a company match), and we would gain an additional $3,450 in tax deferred retirement space. The tax savings on this $3,450 at our anticipated state+federal tax rate of 37.3% would be $1,286.85, which is more than the cost of the corp taxes plus tax filing fees ($800 + $400 + e-filing fees).
In 2 yrs, I would probably be in a place where a 401k for my solo practice makes sense and at that time I would roll the SIMPLE IRA over to the individual 401k, then start the backdoor trick.
Any suggestions/critiques of this reasoning? How do you make “employer” contributions to a 401k if you don’t have a corp set up? Do just file a “business” with the city and file directly on your 1040 with the employer contribution listed as a business deduction?
Schwab DOES NOT allow Roth/post-tax solo 401k. Their open account forms and telephone representative verified this. Also note a $20 yearly fee per fund held in a vanguard solo 401k. I love your blog wci, but please update this article.
I’ve updated this article twice in the last month including once to reflect the fact that Schwab doesn’t allow Roth contributions. Did you miss that line in the article?
Not trying to bust your balls wci, just that the table still indicates Roth as an option for Schwab (see adoption agreement http://www.schwab.com/public/file/P-619623/REG30724-03-WB.pdf). You also don’t note the $20 per fund fee from Vanguard in the article (https://investor.vanguard.com/what-we-offer/small-business/individual-401k).
Oh, it’s the table. I couldn’t figure out what you were referring to. Thanks.
Not sure what the $20 per fund at Vanguard is. I’m certainly not paying that in my Solo 401(k). Is that the fee for not doing electronic notices?
Update- NM. The fee is if you’re not Voyager at Vanguard (which I am.) $20 per fund per year until you hit voyager. That shouldn’t take long for a doc doing Backdoor Roth IRAs and maxing out a Solo 401K. Maybe a year or two.
It takes more than two years to get $50,000 into a Vanguard account for a resident investing only in a work provided retirement account, a Roth IRA, and a solo 401k from meager moonlighting income 🙁 .
To me it seems to be a mistake for Vanguard. Their minimums on multiple account and low cost fund types mean my preliminary (small) investments are being placed with Schwab instead. As I become an attending with 6x or more yearly income I’m much more likely to continue investing with Schwab.
I buy Vanguard ETFs through a Schwab brokerage several times a year and use a Schwab fund. It’s not a bad place to be.
Thanks, WCI.
I am a W-2 employee and my wife is an independent contractor with a salary less than 17K. If she opens up a individual 401K, can she contribute all of her income without having to file any taxes?
A related question. I have an IRA with Vanguard that I need to rollover to somewhere in order to contribute to the backdoor roth. The only option I have right now is to move it to my current 401K (Not the best option given the investment choices within my 401K). Is it possible to rollover my Vanguard IRA over to wherever my wife opens up her Solo 401K (Assuming she opens either Fidelity or Etrade that allow rollovers)?
She still has to file her tax return, but shouldn’t owe any income tax. She will owe payroll tax, of course.
You can’t roll your IRA into your wife’s 401(k). Sorry. They’re tied to you.
I’m still confused about the Roth option. I have a TD Ameritrade solo 401k Roth, but I understand that’s only for the employee contribution. For the employer contribution, do I need to open a separate (non-Roth) account? Does that require a different set of plan documents too?
No, one plan document covers both the employee (Roth or non-Roth) and the employer portion (always non-Roth.)
I’ve been reading about the benefits of a solo 401, and I am wondering if we could contribute to it…My husband is a partner in a medical group (not a solo business)- and has an employee 401 K( contributions limited 17.5k), is there a way he can also open an individual 401 K ( to increase the contributions to 52K)? Thanks..
Yes. He can start another business. You have to be self-employed to have a Solo 401(k). Your husband can either do some independent contractor work or start a business in another line of work and start one. A better option would be for him to convince his partners to combine the 401(k) with a profit-sharing plan (raising limits to $52K) and possibly even adding a defined benefit plan on top.
Hello,
This is a very informative post, together with the Mega Backdoor posts. Thank you. Two questions:
1) Can the profit share contribution into the pre-tax, Indiv 401k be rolled over into a TIRA and convert to a ROTH IRA for mega back door? Etrade says they will do it, but they have no comment on whether it is kosher.
1a) Can this be done only in entirety or partial accounts?
2) If I cannot do #1, can I put in my $17.5 deferral into ROTH 401k and then the remaining profit share contribution into a SEP in the same year? And then of course convert the SEP into a ROTH that year?
Thanks,
1) If the 401(k) allows “in-service rollovers” then you can do it. It’s the 401(k) rules that govern, not the IRS rules. Most, but not all, 401(k)s require you to separate from the job before you can do that. If etrade will allow it, then great, I wouldn’t expect any issue with the IRS.
2) I don’t think you can do that. I think that for each job it’s one or the other in any given year. If you make enough income, you can just do it with the SEP-IRA, but of course you can max out a solo 401(k) on less income and the SEP-IRA must be empty at the end of each year in order to do the backdoor Roth.
Here’s a great resource/chart on this subject:
http://taxmap.ntis.gov/taxmap/pubs/p590-008.htm
Great Post!
I just got done reading your book and opened up an solo 401K with Schwab. Just graduated residency in July.
From a tax standpoint is there any difference between employee or employer contributions? Is one better? For an LLC being taxed as an S-corp, both aren’t subject to income tax correct?
This year I will only be able to contribute less than the 17,000. Is there any difference between having say 12,000 as elective employee contributions, or should I still have my LLC contribute?
If employer contributions count as salary that you are not taxed on, my thought is that by having a high employee contribution, this would help increase my salary without increasing my taxable income, allowing the distributions that I take to comprise a smaller percentage.
What do you think?
Mike Piper addressed this issue here:
http://www.obliviousinvestor.com/solo-401k-contributions-employee-or-employer/
He suggests they’re equally advantageous, but I think he’s making the assumption that the employer contribution would be passed to you as an S Corp dividend (not subject to payroll taxes) if you didn’t put it into the 401(k) as an employer contribution. If you instead were going to take it as salary, then of course better to put it into the 401(k) as an employer contribution and call it a business expense.
The other benefit of doing employer contributions is that you can then use your employee contribution ($17,500 total across all 401(k)s at all jobs) elsewhere, perhaps where a Roth 401(k) is available if that’s useful for you.
Great question. Maybe I ought to get my LLC taxed as an S Corp and save a few bucks.
This discussion is timely for me as I’m trying to decide about changing the taxation (and/or legal) status of my LLC to an S Corp or a C Corp. As Mike Piper points out in his abridged description of LLC/S/C’s, there are a lot of different considerations for the “right” one for a business. My interests are to be able to deduct employer solo 401k contributions as a business expense and to have more control on reportable personal/business income year to year (“income-splitting” in a C Corp). Anyone else discerning between S corp and C corp?
I have 1099 income this year from self-employment work I’m doing in addition to my W2 income. the 1099 income will be in the range of $120-130k for 2014. I also have a couple of old retirement accounts from previous jobs ($50k in a 401k with Principal, only $4k in a 401A with Fidelity). I would like to open a solo-401k to maximize my retirement savings this year.
– is Vanguard a good option, or it’s better to use Fidelity since I already have the small 401a account with them?
– what would be the best course of action with the old 401’s?
– if I understand this correctly; I can put $52k (employer + employee contributions) in the individual 401k regardless of the income? I don’t have any other active retirement contributions.
Thank you! your book is quite outstanding by the way. Great read!
It sounds like you have two unrelated employers so you should be able to use a retirement account at each. If I were you, I’d open a Solo 401(k) and make contributions to it from your 1099 income. You can probably get $25K or so into it each year. Check on the rules for your 401(a)- you may be able to simply roll it into your Solo 401(k). I would roll your 401(k) from Principal into your Solo 401(k). Fidelity might be a better choice than Vanguard for you since you may need to do some rollovers into it. Vanguard is fine, but as this article points out, not necessarily the best. Mine is at Vanguard, but I haven’t had the need to roll money into it.
Your contributions ARE limited by your income though. With another 401(K) at your main job (to which you are presumably contributing the $17.5K employee contribution) and only $130K of 1099 income, you’re only going to be able to put something ~$25K into that solo 401(k).
Thanks for the reply. sorry if I confused you with all the details, but I actually don’t have a 401k with my current employer, only the old 401k and 401a. Also both the W2 and 1099 incomes come from the same employer. I have a base salary (W2), then I get paid a “bonus” for extra work shifts at certain hospitals, etc as a 1099 income, but with the same employer, just 2 separate payment arrangements.
so my plan was to open the solo-401k, and contribute the max into that from my 1099 income as follows:
– $17.5k as the “employer’s portion”
– 25% of the expected $130k (~ $32.5k give or take)
– so a total of $50k or so
Did I get this correctly? is the 25% calculated from the gross or net income (after office/car expenses, etc), also does the $17.5k contribution count as an expense for the purpose of calculating the 25% contribution?
One more thing; my understanding is I have to open the solo-401k by Dec 31st, but not necessarily contribute by then, so I can start putting money there in January or so after I have the final numbers for 2014, is this correct?
Same employer equals one $52K limit. The employer doesn’t offer a plan at all? Then you should be able to use a deductible traditional IRA. It’s only $5500, but it’s better than nothing. Of course, you can’t do a backdoor Roth also.
For the 1099 money, you can use a Solo 401(k).
Remember the $17.5K is the “employee” portion but for your 1099 income, you get to do both the employee and employer portion. So on $130K, you get to put in $17.5 + ~ 18-19% of the $130K. Should be something around $40,900. Plus $5500 into a traditional IRA for the employee job.
Yes, must open it by year end (and also I believe make the employee contribution but double check that if it matters) but can make the employer contribution after the first of the year but before filing taxes.
Thanks so much for the info! My current company does offer a 401k but I haven’t signed up yet, got distracted and wanted to sort out the 1099 income and prior accounts first. They don’t offer employer matching contribution so not sure if I will sign up or just rely on the 1099-funded solo-401k.
Greatly appreciate the discourse…I certainly learned a lot. I have been following this thread since inception and finally decided to roll with E-Trade…The kicker? A little asterisk on their $600 promo read: “Call us to see how you can qualify for more…”
For my initial $400K solo deposit, they gave me $1K…Bottom line: regardless of your deposit, there is room to negotiate. In short,they want your business; ask for more.
I feel a bit confused over the meaning of the Roth option and IRA Rollover characteristics of different companies. I recently became an independent contractor, so it looks like I should be opening a solo 401k to fully take advantage of the backdoor Roth IRA.
Since I would need to have a traditional IRA, that I will then convert to a Roth IRA, which then will be rolled over in the 401k, which company would allow me to do that?
Also, does rolling the Roth IRA to the 401k decrease the total amount of pre-tax money I can put in the 401k?
Thanks
You’re a bit confused, but only a bit.
You put $5500 into the traditional IRA, then convert it to a Roth IRA. That’s the backdoor Roth IRA.
If you happen to have a traditional IRA with deductible money in it (remember the $5500 you put in it as an attending didn’t give you a deduction), then you have to get rid of it if you want to do the backdoor Roth IRA. Rolling it into a 401(k), including a solo 401(k) is a great option that avoids a big tax bill.
Rollovers/transfers don’t count toward your contribution limit for the year.
Does that clarify things? If you want to do Roth 401(k) contributions, then you need a Solo 401(k) with a roth option. If you need a Solo 401(k) that will accept a rollover, then make sure you choose a Solo 401(k) that accepts them.
I have a friend with a 401k loan at a job he was just laid off from.
He has $65k in an IRA, $1000 in his 401k, and owes $31k to the 401k.
He has a side business he’s used for options trading that is it’s own entity, so I think he’d qualify to set up a solo 401k.
I could see it working like this:
Set up a solo 401k with a company that offers both IRA rollovers and borrowing from the solo 401k.
Roll the $65k over from the IRA to the new Solo 401k.
Borrow $31k from the new Solo 401k. (Less than 50% and $50k)
Pay off the $31k loan from the old 401k.
He could then rollover the old 401k or leave it where it is. It wouldn’t matter.
His lay off was unexpected and we’re just trying to save him all the tax and penalty burdens. He’s okay continuing to pay on the loan.
Do you guys have a solo 401k provider in mind that could accomplish this?
Do you have any other ideas to avoid the taxes and penalties associated with having the loan when he gets laid off. If he does nothing, he will owe taxes and penalties on $31k.
Thanks in advance.
That’s a good example of why you shouldn’t borrow from a 401(k). Especially to start a business trading options. At any rate, I believe eTrade’s Solo 401(k) allows both loans and rollovers. I don’t know that he could get the account opened, IRA transferred, money borrowed, and 401(k) paid back quickly enough, but the scheme might work. If he’s laid off for a long time, the tax cost to pull the money out of the 401(k) might not be that bad. The penalties will still apply, of course.
I agree with you wholeheartedly about not borrowing from 401k’s to begin with. It’s generally a terrible idea. He borrowed the money to send his daughters to college, so there is some potential there to save the penalty if it’s considered a withdrawal for college, but we’re just trying to save him the most money right now. Meeting with him again this afternoon.
Lots of financial lessons here- someone with only $100K saved for retirement taking a third of it to pay for college. I hope those kids study hard because it sounds like they’ll need to provide significant financial support to him in his retirement! There’s a reason most financial planners always advocate “retirement first, college second.” You can’t get loans for retirement, nor just choose a “state school” or “community college” retirement! It’s sad that anyone has to go into debt for education, but if anyone has to do it, it ought to be the student! I’m probably preaching to the choir here though.
silly/stupid question here; is it ok to put all my retirement money (in this case my solo-401k) with one company, let’s say Fidelity? in other words is there risk here in case any one company goes down, does it make sense to have my retirement savings between a couple of companies or more, and alternate contributions, etc to reduced potential “company failure” risk? or the funds themselves have nothing to do with the managing company?
Yes, it’s okay. The most important thing is what the money is invested in, not the particular portal you go through to invest it. But if you’re worried, spread it around, it’s not too hard to keep track of 2 or 3. I’ve got an account at Fidelity, one at the TSP, Roth IRAs at Vanguard, a self-directed Roth, a Roth at Bridgeway, a brokerage account at Schwab for my 401(k), a brokerage account at TD Ameritrade for my HSA etc etc. But I’d love to have it all at one company if I could.
How are you able to have so many Roth accounts at different places if we are only allowed to contribute and convert up to $5500/year? Or am I missing something else regarding roths?
You can roll over part of a Roth to another IRA provider. That’s how I do it. $5500 a year is the total contribution to all your Roth IRAs. Once it’s in there you can move it anywhere you want.
Is that necessary or do you just like to have eggs in different baskets?
It’s not necessary, it’s required in one case and cheaper in the other. About 3/5 of my Roth IRA is at Vanguard. 1/5 is at Bridgeway (my microcap allocation) because it’s cheaper to buy the fund directly from Bridgeway than to buy it at the Vanguard brokerage. 1/5 is at Lending Club (Peer to Peer Loan allocation) because Vanguard doesn’t offer that asset class, at least not yet. You can learn more about my portfolio here:
https://www.whitecoatinvestor.com/how-i-currently-implement-my-asset-allocation/
also do I necessarily need an accountant or financial adviser to start the solo-401k? or it’s better just to go ahead and open one with Fidelity then do the contribution math myself?
Turbotax will do the calculating for you. You certainly don’t need help filling out the paperwork. I just recertified my Vanguard one (have to do that every 6 years apparently) a few minutes ago in about 3 minutes.
Hi
I am looking into setting up a solo401K with Etrade but was talking with a financial adviser that mentioned that by law I would need a “3rd party administrator” for the fund (which I would have to find on my own as Etrade does not provide this). Does anyone know if a CPA can act as the 3rd party administrator or if this has to be someone that I hire independently if needed? Thanks in advance for any advice.
No, I don’t believe that CPA = TPA, TPAs are quite specialized in what they do. And whether or not you require a TPA at all depends on your business entity, number of employees, and what you’re trying to accomplish. In my case, I have had an LLC and a standard solo401k sufficed – so I set it up directly through Vanguard, that is – without a TPA – and I was good to go. However, this past year I also launched a C Corp in addition to the LLC, and because – with two entities, IRS “controlled group” rules applied, I learned that I needed a more customized solo401k in place – so I hired a TPA to help set this up for me. You may find articles here on WCI by Konstantin Litovsky, a guest contributor on this site, to be helpful to you in answering some of your questions about retirement plan set-up and administration.
I certainly don’t have a TPA for my individual 401(k).
Could you comment on the issue of using 401K money to pay life insurance premiums? I have a simple term life insurance policy. I understand that I can “draw” funds from my 401K to pay the premiums. Does a given plan have to be structured to allow me to do this – or would all plans allow this? Thanks!
You can withdraw money from a 401(k) paying all applicable taxes and penalties. You can also borrow money from a 401(k), paying any applicable interest. Not sure what else you’re referring to. Lots of insurance salesmen like to encourage people to pull money out of their 401(k)s in order to fund cash value life insurance. I think that is usually, if not always, a bad idea. https://www.whitecoatinvestor.com/the-retirement-tax-trap-another-way-to-sell-you-insurance-you-dont-need/
I have read all the comments above but I am still a little confused about how a solo401k would work with my situation.
My current job has 401k with profit sharing. I will be maxing out my contribution to 18k this year (2015) for my main job. With employee matching and profit sharing the account will be maxed out at the 52k.
I am starting moonlighting next month as an independent contractor at another hospital. I will only probably do 1-2 shifts a month there making a couple thousand a month. Should I set up a solo401k for the moonlighting job to add to my retirement and if so how much can I contribute to the solo401k if my other account is maxed out.
Yes, and just under 20% of what you make.
so if my contributions for a solo 401k are capped at 20% from the independant contractor job is there any benefit to doing the 401k over a SEP IRA?
Yes, it allows you to still do backdoor Roth IRAs.
What do you think about contributing 1099 income to a SEP-IRA with the goal of rolling it into old TSP?
Admittedly, being a little lazy about opening solo 401K for a small amount of 1099.
I think that’s fine. Another good option for a small SEP is just converting it all to a Roth IRA.
The employee salary deferral limit (2015=$18K) is per employee (except for 457).
However, the annual addition limit is by employer (except for 403B).
If you have maxed out both the $18K and $53K limits in your work 401k, your can not make additional employee salary deferrals to a self-employed business retirement account, but you can make a $53K profit sharing contribution to one.
For a sole proprietor, this is 20% of self-employment income (net business profit – 1/2 SE tax. For an S-Corp, this is 25% of W2 wages.
The same $53K profit sharing contribution would be possible in either a SEP IRA as james said, or in a Solo 401k.
Well, that’s interesting. That would mean you could max out an individual 401(k) or SEP-IRA on less income as an S Corp than as a sole proprietor. Gives a little more reason to form an S Corp.
You already have a 401k so you would probably open a SEP IRA for the money you make moonlighting. You can put about 20% of net profits into a SEP.
Thanks for this great blog Doc, and appreciate all your helpful posts at Bogleheads forum as well.
Will greatly appreciate responses to my question:
I have a 1099 income of roughly 180K for this year, have an S-Corp structure in place for this, my wife has a full-time job with a great 401k matchup plan from her employer that she contributes entirely. She also happens to be a 50% shareholder in the SCorp.
1. Once I setup the Solo 401k, can she make non deductible contributions as well?
2. Can I setup deductible and Roth 401k and contribute to both of them? I understand that the employer contributions will only to to the deductible 401K plan.
Kindly advise.
Thank you.
1. Does your business employ your wife? If so, then she can make deductible contributions. Most solo 401(k)s don’t take non-deductible contributions.
2. You can put the employee contribution into either the traditional side or the Roth side. Employer contributions only go to the traditional side. So yes, you can do both in that sense.
As of 3 months ago, there was not a single solo 401k turnkey plan out there that allowed for non-deductible contributions and inservice rollovers. I checked everywhere! I’ll bet they will offer it in the near future though.
What you can do is use a TPA plan document. Ascensus’ Idividual and Prototype documents have everything you need. Cost is $195/year. You can use any brokerage you want as custodian. You will have to do the bookeeping and keep track of the contribution type, etc. . . . easy to do with software that’s out there now (Quicken, for example).
Great blog! Been following you for about 6 mos and learning exponentially!
I’m a military doc stationed in California and would appreciate simple advice:
I make about $150K in the military and contribute to the TSP. This week I started moonlighting (1099) and stand to likely double my salary in 2015. Other than the TSP, I have about $15K in a 401K from residency at TIAA/CREF. Also still have about $180K in debt leftover from undergrad/residency/wife’s loans/stupid tax.
I’m working on my debt (pseudo Dave Ramsey), but also don’t want to get crushed in taxes (50%!?!) on the 1099 income.
So, if you were me, how would you set up your financial house?
I’d live like a resident, max out the TSP and as much as you can get into a Solo 401(k), consolidate my old 401(k) into the TSP, and pay off the debt ASAP. If you’re living now on $120K, keep doing that and direct all the savings toward those loans.
thanks WCI. Would you max out i401K via sole proprietor income employer contribution (as above) to shelter from taxes or smarter to take the tax hit and use the money on the debt? Almost all is 3-4% and some at 6%. Also, all things being equal, default to a Vanguard index fund?
Why not do both? Only 20% of the income can go in the 401(k). If 40% of it goes to taxes, the other 40% can go to the debt. What you invest the money in should be dictated by your written investing plan. Have you made one yet?
No written plan yet. At this point I’m 80/20 in the C/G TSP Roth funds. Have just been trying to follow S&P. Not sure I fully understand the 20% point? I can contribute $18K as employee and an “employer contribution” to $54K on top right? That’s about 36% of total 1099 income (~$150K)– but around 18% of total (w2 + -1099)
Do you know if I can do i401(K) with employer contribution at TSP? I’ll phase out of Roth with this income too right?
On self-employed income, you’re allowed to put 20% of it into an individual 401(k) as an “employer contribution.” You can put your employee contribution ($18K) into the TSP. If you’re military, there is no match for the TSP, but it’s a great 401(k) anyway. Yes, you’ll almost surely be phased out of direct Roth IRA contributions and will have to do them through the backdoor.
Hi- I wanted to get clarification on the ability of an individual with a solo 401k plan to add their spouse to that plan. Are there any requirements other then just plain “being the spouse”? Does the spouse have to demonstrate/ document any activities related to the practice? In my case, my wife has a full time job unrelated to my practice. She receives a W2 from her employer. My principle goal in having a joint 401K plan with her is in order to roll in various investments from her prior jobs. (clean up the portfolio of lousy funds etc.) I would likely open the 401 with Vanguard. Thanks!
well . . . with the caveat that I’m not a tax guy and don’t know your exact situation, here’s what I’d do . . . . assuming you’re an unincorporated sole proprietor and you file a joint return, take the “Qualified Joint Venture” election on your 1040 (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses). In doing so, the IRS treats like a partnership in that you two share profits, losses, etc. in proportion to your respective interest. You must file 2 Sched C (and SE if needed) but you only have to open 1 solo-401k.
If you are incorporated (C, S, LLC, etc.) and the sole owner, you will have to run payroll and pay your wife a salary (W2 NOT 1099). She can join then too . . .
Keep in mind that contribution limits for your wife INCLUDE what she’s getting from her other job.
Hope that helps . . . .
I have just started working as 1099 and looking to open an individual 401K. I wouldn’t be investing too much (employee – $10000; employer – $10000-20000). What would be my best options. I have an existing (not active) 401K but not looking to transfer it. May opt for a loan sometime in the future (10% chance). What would be the lowest fee option in my case? Experts, please?
They’re all pretty low fee. If loans are a big deal, why not eTrade?
Thanks so much for your quick reply. If I’m not going to take any loans out of it, what is my best option?
That’s what the article is all about. Mine is at Vanguard. My only beef is you can only get investor shares. Expenses would probably be a little lower elsewhere buying the Vanguard ETFs.
Why can’t one get Admiral shares through Vanguard’s solo 401k? Just wondering…
I guess that’s how they make up for the costs of it since there are no other fees. Annoying, I know.
It depends what kind of investment options you want, the lowest fee is to be your own trustee. However, if you want to invest in traditional stock market options you then have to find a low cost broker and you have to personally remain in compliance.
I have my 401k/Roth 401k with Etrade but would recommend TD Ameritrade over Etrade. TD’s standard plan document allows Roth and loan options. For me, the primary advantage that TD has over Etrade is that their commission free ETF selection is far superior to Etrade. TD offers the full spectrum of Vanguard ETFs as NTF trades. Other than the transaction free ETF options, the two are a coin toss . . . .
One thing to consider is using a TPA plan document (Ascensus, for example). This would allow you to go crazy with non-deductible contributions and roll them into Roth vehicles . . . just sayin . . .
Great tips, thanks!
Thanks for this – was about to transfer from E-Trade to Vanguard. Then thought, “Investor Shares Only – WTF?” Was thinking about leaving it at E-Trade and buying Vanguard ETFs with the 9.99 commission. Wouldn’t have even thought to look at TD if not for this comment.
Chris, good information.
For others… I just talked to a rep at TD Ameritrade and felt like he was interested in my business 🙂 He spent the time to walk thru all the documents and answer all questions. Better than average knowledge about Solo 401K’s. I will be opening an account with TD mainly because of the loan provisions, a loss for Charles Schwab.
Schwab doesn’t allow for a Roth option either, which I find surprising . . .
I’m back with a follow up on my experience with TDAmeritrade. No doubt, I would recommend them without reservation.
All paperwork was processed promptly and my funds were transferred from Schwab within one week. The entire process from opening an account to having funds in my 401K took about two weeks.
I promptly applied for a 401K Loan and it was processed promptly.
I would however caution anyone to ask questions so that yoru paperwork is filled out properly, if you have a question ASK.
Does TD allow you to rollover a backdoor Roth IRA?
TD Ameritrade allows Roth IRAs, roth IRA rollovers, Roth IRA conversions, and non-deductible IRAs.
So one could do a backdoor Roth IRA and roll it into a solo 401k – all set up at TD Ameritrade?
You lost me. I’m not sure I see much advantage of rolling a Roth IRA into a Roth solo 401(k).
I’m probably confused about the process of how going through the backdoor for a Roth IRA works. I read your ‘Backdoor Roth IRA Tutorial’ and the third bullet point mentions rolling the money over to an individual 401k.
Never mind. I think I figured it out. The roll over is only need for existing traditional IRAs, SEP-IRAs, or SIMPLE-IRAs that are funded above the $5,500 in order to avoid taxes during the conversion. Is that right?
Yes, you need the balance of all IRAs to be $0 on December 31st of the year you do a conversion to avoid the pro-rata rule issue.
IRS rules do not permit a rollover from a Roth IRA to a Roth 401k. For that matter, you can not rollover a Roth IRA to anywhere other than a another Roth IRA
Ugh! Anybody interested in my follow up TD Ameritrade experience?! So, I took my own advice above and went with TD Ameritrade for my new Solo 401k. I terminated my Solo DB at Schwab and took the lump sum distribution, did a direct rollover to TDA. TDA had an offer of $2500 for opening an account with a transfer of over $1,000,000. Spoke with 2 different phone reps and rep in local San Diego TDA office: they all confirmed the $2500 offer as well as 100 free trades! The transfer went through without a hitch (sort of) but nothing but problems since.
1. TD elected to not honor the transfer offer. They decided that it did not apply to Solo 401k accounts because it would be an ERISA violation. My son ( CFP) checked with his local pension firm and their legal/compliance team. They called B.S. on that reason. They said that Solo 401K accounts are not covered by Title 1 of ERISA. In fact, the DOL is quite clear in specifically stating in CFR Title 29, Section 2510.3-3, an individual and his or her spouse are not considered EMPLOYEES! Classic bait and switch!
2. TDA does not allow ACH deposit transfers. I have to mail a check, pay for a bank initiated wire transfer or use my bank’s online bill pay (I went with this one). They put a hold on the deposited funds for 10 days!!! If I want to trade sooner, I have to call the 800 # and have a rep bypass the website hold.
3. Check all your transaction receipts!!! TDA was charging commissions on my initial ETF trades . . . .even though most were part of their commission-free ETF lineup and I had 100 free trades!!!!! They promptly refunded ~$100 in fees when I pointed it out though . . . .should I have to do that???
4. LOTS of minor problems with their website. For example, interface with Morningstar is buggy. The “Portfolio Planner” is a mess and doesn’t even recognize some of their commission free ETFs!
5. Discovered Schwab charged me $50 to transfer funds and SO DID TD AMERITRADE to receive the $$!!!
Wow, if I had it all to do over again, I would have stayed with Etrade!
Ugh!
Thank you for sharing your personal experience. That is very valuable.
you’re welcome. quite honestly, I was a bit stunned by the whole experience. when I catch my breath, I’m going to move my $$ out of there.
Guess what I just learned?! ETrade Platinum clients get access to the ENTIRE lineup of Vanguard mutual funds, ADMIRAL class, transaction free!!! I can buy them in ANY ETrade account (brokerage, IRA, 401k, etc etc). Wow, I’m REALY regretting my decision to open the TDAmeritrade account! So, to summarize this discussion: Etrade i401k allows loans, has Roth option, allows ACH deposits, provide access to all Vanguard funds, Admiral share class (for Platinum clients) . . . I think we have a winner!
Wow–what do you need to do to become a Platinum client?
Are you talking about free admiral class mutual funds of free etf’s to buy?
Don’t know what the Platinum criteria are. I have ~$1,000,000 in assets at Etrade. I’m talking about Admiral Class shares of Mutual Funds (not etfs).
Hows etrade going? what are the requirements to become a platinum client?
I don’t think there is such thing as platinum client. I ask my E-Trade rep and he does know about it. I have around 400,000 that I rollover and I was able to buy Admiral shares of VTSAX. You can’t do it online though.
You’re right. They changed the name for some reason. It’s an “Elite client” now. I have NO idea what the inclusion criteria are nor do I know what the standard benefits for Elite clients are. I do know that when I call their customer service number, they route me directly to a live person. I have a dedicated rep and they toss in some free trades. Vanguard Admiral shares must be purchased via telephone but my rep gets the transaction fees waived. I’ve been with E-Trade for ~12 years. My old statements show me as a “Platinum Client”.
Honestly, I don’t understand it. Almost all my $ is in Vanguard Admiral funds or ETFs. They give me almost all my trades for free. I don’t keep any cash in my accounts. How are they making any money off me???