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!
I am transitioning out of the military and will be an IC with a 1099. I plan on staying in the air national guard. Can I max out an individual 401k and still put some money from bonuses and drill pay into my TSP?
The employee salary deferral limit which is $18K in 2015, would be across both the TSP an a Solo 401k.
There will be a separate annual addition limit which is $53K in 2015. The annual addition limit is the total of both employee salary deferrals and employer profit sharing.
So if you deferred $8K in the TSP, that would leave $10K deferral available for the Solo 401k. The Solo 401k profit sharing would solely be limited to $53K – whatever deferral you could make.
This is a maximum. The profit sharing contribution is also limited to 20% of self-employment income = net business profit – 1/2 SE Tax.
I have seen conflicting info about this issue. I asked my accountant about being able to contribute more by using a solo 401(k) and this was his response: Thoughts?
“The (solo) 401(k) is not available to you since you have no employees in your business-it’s all self-employment income and the SEP-IRA is your best option for maximizing retirement contributions and minimizing taxes paid on your self-employment income. Let me know if you have any other questions on this issue.”
I was recently told by a financial planner that even if my 401k is maxed at 53k for the year at my main job (paid on a W2) I could still do up to 25% of my 1099 salary as a SEP IRA.
That’s almost true (it’s actually just less than 20%, not 25%), but irrelevant to his question, which is about a solo 401(k), not an employer’s 401(k).
Get a new accountant. That one is an idiot.
I also have no employees in my business and my solo 401(k) works just fine. In fact, if you have an employee that isn’t your spouse, you CAN’T use a solo (individual) 401(k).
I continue to be amazed how clueless some accountants are. It has been more than a dozen years since a Solo 401k became an option. Especially, to have it exactly backwards.
@WCI, point of clarification, YOU CAN STILL use the Solo 401k option if you have PART-TIME EMPLOYEES that have less than 1000 hours/year per IRS reg; however, some institutions discussed here in the thread and your article may not let you put in a years of service requirement. Logic being seems to be that they do not want to get involved in calculating or testing that part-time employees were under the 1000 hour limit. Shop around if you that is a requirement as some do.
Hmmm…that’s a great point.
The solo 401(k) is a wonderful option for people with no employees. Specifically because you can be the trustee of your own 401(k) if you want to invest in a wider range of options, and you can avoid unrelated debt financing on the purchase of real estate. Its incredible that more professional tax people are unaware of it.
So TDA allows roth options, loans and IRA rollover. They also offer a decent amount commission free ETFs. List of commission free ETFs : https://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp?fromSectionLeftNav=true
So TDA > Fido or TDA = Fido?
I suppose it is personal need, but, for me, I have no need for a loan and may rollover a previous 401k. For these two purposes – TDA and Fido are tied.
Is a 401K roth option something a doc may need to use in his/her career? I read about it some and it leaves me a bit puzzled. I am not what it actually means and what the benefits are of using this Roth option inside a 401K. Thoughts?
Also, should I go with FIDO or TDA?
Sounds like TD Ameritrade is a great option. I use them for my HSA and it’s a nice interface.
More details on Roth 401(k) here: https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Any downsides to TDA? I really do not see any…but perhaps I am missing something?
Thanks for the link about the roth vs not. Still kind of puzzled about the Roth option. Spouse and I are both docs so we make decent $ – not sure if that makes more sense to go with Roth…
I see no downsides. I couldn’t get all that info when I first wrote this post.If I were doing it over again, I’d probably be looking at etrade or TDAmeritrade instead of Vanguard. As I begin to get a significant sum in it, those investor class ERs are starting to add up. 10 basis points is now $150 a year and growing.
Thanks. Good to know I am not missing anything.
A silly question, but how do I contribute to this 401K? I know the limits, etc and realize I can put in around 18-19% of earned 1099 income (all profit in my case). Do I have to deposit using a different account than what my W2 income comes in or doesn’t matter? Also, is there way to specify whether it is an employee vs employer contribution? I suppose I just deduct this income from my 1099 specific tax return at end of the year?
I don’t think it matters much if you’re a sole proprietor. I do mine on Vanguard’s small business website. I bet TDA has something similar. You specify on the site whether it is employer or employee. Yes, it goes on your 1040, first page.
Thanks. Good to know I am not missing anything.
How difficult or easy is it for me to add my spouse to this i401K? What is the process? I generate most of my 1099 income doing chart reviews – how can I add the spouse on? And do the same rules apply – i.e. approx 20% of profits can be added to the spouse i401k? Would the spouse need a new i401K app?
The spouse has to have earned income from the business. Then he/she gets their $18K employee contribution plus whatever employer contribution is allowed (20% of net income until you hit the $53K limit.)
WCI, could you not move your solo 401k over to TDA?
I thought about going with TDA, but being new to investing I don’t feel confident with ETFs yet. ETFs seems like a hassle and I’d likely lose more money buying them (and prob spend way more time than I’d like to in buying them) than going for the slightly higher ERs with Vanguard’s Investor share mutual funds.
Yes, I could. But keep in mind I don’t need the loan, rollover, or Roth feature right now. I’d be doing it just for slightly lower ERs. It’s a little harder to get up the motivation to get it done for that. It’s not like the Vanguard one is bad, it’s just that I can’t get admiral funds. And who knows, that may change at any time.
Lun, I understand your not needing the loan provision, but it can be a safety net if you ever need it.
We use the loans for major purchases such as automobiles and pay ourselves the interest instead of the bank.
Good point. I never thought of that, but I suppose it is nice to have in a pinch.
Ditto. Didn’t think of that.
Can you say more about how you do this Len and what the advantages of this are?
I plan on opening a solo 401K before Sept. and the quarterly taxes ie put the money in the 401K vs give it to the IRS. As I haven’t researched it enough I plan to put in the employee part as I have not figured out yet how to calculate the 20% of the employer part. I have decided against TDA as I don’t have enough info on the ETF funds. Is e-trade also mostly ETFs?I am thinking Vanguard (yes annoying con is the block for Admiral funds) as it just seems the easiest to choose where to put the money. I do NOT need roll-over,loan option. I just need a carrier with broadest/index fund with lowest ER for someone who is new to this. Please SUGGEST!
In general, at a brokerage like TDA or etrade, the commissions on ETFs will be much lower than the commissions on mutual funds. Typically an ETF is free to $10, while a mutual fund is $50 a trade.
You’re in the same boat as me. Vanguard is fine, but if you’re willing to deal with a little more hassle, it may be slightly cheaper to buy Vanguard ETFs at TDA or etrade. So far to me it isn’t worth the hassle to move from Vanguard for that. I’m secretly hoping I’ll eventually get Admiral shares.
This may have been addressed in the past, but if anyone can offer more details, I would greatly appreciate it. I work on 1099 income a few days a week, which is my own LLC with S Corp tax structure, and on W2 income for the rest of the week. I am working 6-7 days per week, and my 1099 income is ~200K/year while my W2 income is ~250K/year. A profit sharing plan from my W2 employer starts next year, so I won’t be contributing to a plan with them in 2015. Would it make more sense for me to start a Solo 401K for 2015 or a Sep IRA? I may consider the borrowing option in the future, which is making me lean toward solo 401K, but it seems like rolling a Sep IRA into a solo 401K isn’t that difficult anyway. By the same token, if I start a solo 401K and things work out well with my current employer and I get their profit sharing plan next year, would it be better to roll the 401K funds into a Sep IRA at that point, or just to start with a Sep IRA from now? I’d appreciate any input. Finally, given the referenced salary numbers above, would it make more sense for me not to use the Roth option for tax bracket purposes? My status for tax filing purposes is single. I appreciate any input. Thanks!
Solo 401(k). It allows higher contributions at some incomes and situations and allows a backdoor Roth.
Once your employer’s plan is up and going, it sounds to me like you get two (but remember only one employee contribution.) I see no reason for a SEP for you (or most docs.)
https://www.whitecoatinvestor.com/multiple-401k-rules/
I agree with WCI. A Solo 401k will never have less contribution space than a SEP IRA. At least this year you will get the extra $18K employee salary deferral. You can then choose to use your W2 401k or Solo 401k for next year’s deferral.
You should open your Solo 401k soon, because W2 employee salary deferrals can NOT come from salary already received. A sole proprietor can wait to make employee salary deferrals until their tax filing date included extensions. Both can make employer contributions until their tax filing date included extensions.
At your income/marginal tax bracket it almost always is better to choose pre-tax contributions over Roth contributions. The reason the backdoor Roth is recommended, is because you are choosing Roth contributions over taxable investments. A pre-tax IRA contribution is not available at your income.
Forgive my ignorance, but can you clarify the following: “The reason the backdoor Roth is recommended, is because you are choosing Roth contributions over taxable investments. A pre-tax IRA contribution is not available at your income.” I have a hard time reasoning why backdoor Roth is a good strategy for individuals with high marginal tax bracket.
Normally, someone in a high marginal tax bracket will want to use their “tax deferred” space first. As this will reduce their taxable income and reduce their tax liability at that high marginal rate.
However, a backdoor Roth allows you to make additional “tax advantaged” investments. While you do not reduce your current tax liability, you reduce your future tax liability, because Roth contributions grow tax free.
If you didn’t put the money in the Roth, your other choice is a taxable account subject to tax liability on the earnings and appreciation.
High earners can’t deduct traditional IRA contributions. They cannot contribute directly to a Roth IRA. Their choices are a taxable account, a non-deductible traditional IRA, and a backdoor Roth IRA. When those are your only choices, a Roth IRA looks pretty awesome. But if we’re comparing maxing out your 401(k) to a Backdoor Roth IRA (if you can’t do both) that’s a different question and a higher earner will probably want to max out the 401(k) first.
Thanks for the clarification. Makes more sense now.
I just spoke to TD Ameritrade and their solo 401k can accept old 401K/403b rollovers. In addition, they currently offer a bonus for rolling over funds – the same price structure as E Trade. They also have a Roth option – for the employee contribution only ($18,000 a year for age under 50).
Thanks for the update.
As I understand it, TD doesn’t offer bonuses for 401k solo due to regulations. You have any idea of how to open up a 401k solo and still get the bonus?
WCI:
I am responding to your comment on Aug 21. I too have Vanguard and it bothers me that I can’t get Admiral shares in the i401k. I am therefore considering opening an i401k at TDA so I can buy Vanguard ETFs at super low expense ratios.
Why do you say that it is not worth the hassle to switch to TDA?
I did an analysis of my 401k at Vanguard: I am paying $690/year in fees via expense ratios. If I switch to TDA i401k and buy commission-free Vanguard ETFs, this would drop to $427/year. Net savings is $263/year. Put this into a compound interest calculator: 263 initial, add 263 per year, interest 10.8%; this grows to $20,300 after 20 years.
I put $263 of gas in my boat yesterday.
I don’t deny there are savings there. I’m just saying they aren’t huge. Any tiny savings compounded out for a few decades is large, but if you look at everything you buy that way, you’ll quit spending money all together. So far, the convenience of being at Vanguard and not having to do any paperwork has made up for slightly lower expenses at TDA. Maybe as that balance grows that’ll change for me. I also find buying ETFs to be a pain. I’d much rather not have to put in trade orders while markets are open.
Can you explain more why ETFs are a pain compared to mutual funds?
You just have to put buy/sell orders in during market hours. It’s not a huge issue. I use both, whichever is cheaper in a given account.
I opened it at TD Ameritrade–and got charged 10 bucks because I did not press the stupid “enroll me free in ETFs” button-so letting others know–you have to click it one time to “activate the service”.
I filled out the form in their office-the reason it is complicated is because it was done by “a third party” so many of the questions are not relevant even incorrect–for example list all employees(when you are not even allowed to have any except for spouse).
Question:
1. I plan on doing all international there as my 457 has all domestic due to ERs. Would you rec. 90% VEU-Vanguard FTSE All World Ex US and 10% VSS-FTSE All-Wld ex-US SmC?
2. I also plan to contribute every month due to DCA
3. Can someone explain to me the bid/ask spread–I still don’t get it and what relevance it has for me
——-
If you are using TD Ameritrade and their free ETFs which ones did you purchase?
1. Any reasonable combination is okay. 10% small is a little less than I’d pick, but it’s fine if that’s what you like. I’d say 10-50% is reasonable.
2. Great.
3. Minimize your number of transactions and you’ll minimize your bid/ask spread costs. Basically, when you go to buy an ETF, people might be offering $30.10 a share to buy it. But those selling it want $30.15. That’s one spread that may affect you. You’re basically buying at 30.15 and selling at 30.10, losing 5 cents a share. More frequently traded ETFs have smaller shares. That spread is going into the pocket of the market maker as the profit for their service (i.e. facilitating the transaction and ensuring liquidity in the markets.)
Thanks WCI,
That explains it very well. I wonder if someone did an analysis then of what is the real cost of ETFs vs. their IF counterparts. I don’t plan on buying/selling just buying slowly.
I have a question for WCI or anyone else stalking the blog:
I’m a resident married to a freshly minted attending. We are trying to maximize our retirement savings and had been contributing to Roth IRAs during residency. Along with her bigger paycheck (woo!), we are phased out of the Roth and trying to switch to the backdoor approach. Unfortunately I have ~$25K in a rollover IRA from a prior job’s 401(k) which would make me liable for pro-rata tax.
My specialty has few moonlighting opportunities, but I managed to work one shift this year for $1K that was paid to me as an independent contractor. My plan was to open a solo 401(k)–likely with TD Ameritrade–then contribute whatever the max of the $1K of Schedule C earnings is, then roll over the rollover IRA into the solo 401(k). This would allow me to have $0 balance in traditional IRA at year end, even if I contribute another $5500 and convert it to Roth.
I may or may not have additional moonlighting opportunities next year or in the future. Does anyone see a problem with this approach? Am I missing some requirement for ongoing non-W2 earnings to keep and maintain a solo 401(k)? Anyone have a simpler solution?
Sounds great. I see no issue. I don’t think there is a minimum income to open an individual 401(k).
Nothing wrong with this. A common technique used to shield IRAs from pro rata calculations.
I am about to open a i401k and I keep going back and forth between doing it with my CFP at 1.5% + $375 a year for a TPA or doing it on my own with Vanguard and now possibly TDA after reading some of the comments here.
I want what’s the easiest to do. The one thing the CFP put in my ears was about “having” to have a TPA which makes me wonder is it difficult to do it on my own? I thought the only form I’d have to deal with is when I hit $250k? Or are there some forms I need to fill out yearly and they’re easy and I don’t need a TPA or difficult and need help? I like Vanguard because of the Roth option and low fees. I don’t know if the loan option is something I need so not sure it’s something I’ll miss. Can someone give me an example I’d need that option? Same with not being able to do Admiral Shares or having a brokerage, not sure I care. I figured on doing a Target Date or Life Strategy Fund with Vanguard, is this a good idea or anyone have experience with it? I just want to put money in an account, watch it grow and not have to deal with too much paperwork or guesswork on which funds, ETF’s, etc to put the money in.
So Vanguard, ETrade which checks all Yes’s, or TDA based on what I’ve said so far? And any help on what I’ll need to do annually would be appreciated.
I set mine up with Vanguard. It was really easy. I went back-and-forth between Vanguard and TDA for all the reasons you mentioned. In the end, Vanguard seemed the better fit for me. I’m not sure about the TPA question–will be curious about other people’s responses.
You don’t need a TPA for an individual 401(k). Give me a break. And you certainly don’t need to pay 1.5% to anyone for it. Geez, we’re whining about having to use investor shares instead of admiral shares (12 basis points) while you’re considering paying someone 150 basis points.
If you’re not worried about the difference between investor and admiral share ERs, I’d just open at Vanguard and tell your CFP to shove off.
wow, not to tell you what to do but, you might want to consider getting another adivsor . . . or, at least, interview some others. There is no rationale (legal or psychological) for a TPA with a individual 401k. It’s stunning that a CFP would push otherwise. With a turnkey Vanguard Individual 401k, the only paperwork you have to do are your tax returns and a 5500 when your account balance exceeds 250k.
Thanks, Chris. I called the CFP after speaking to Fidelity and them telling me it’s only the 5500 once I hit $250k and he said he only knows of the funds they work with and needing the TPA. I don’t think he’s being unethical or anything as he said he didn’t know but it’s no surprise there would be more fees going the way of a FP. My main concern is just making sure I don’t mess up and I feel much more comfortable after reading this blog and everyone’s comments that I can easily do this on my own. It sounds like Vanguard is very easy and TDA has some extras above Vanguard so now I need to decide between the 2. I have a CPA to do the taxes and it will be at least a 5-7 years before I hit the $250k, hopefully sooner 🙂
Thanks, Greg. TDA is only of interest to me because of the comments I’m reading as it seems you can do Vanguard from there and it costs less than through Vanguard (seems weird)? Plus you can do loans against your 401k and I guess you can’t do that with Vanguard. I didn’t think I would need a loan but some of the comments here made sense and you just never know.
WCI – Well when I called Vanguard to ask about paperwork the lady seemed to not know much information and confused me a little more with her answers. I asked directly are there forms I can simply fill out but she gave a non-answer. The CPF is just one route but from the mere mention of it, you seem like it was a bad question to ask. I’m just here to try to learn and ask questions. I don’t know if I need a TPA or not, it seems like I don’t based on your answer so that’s good. I am not in favor of just giving away 1.5% but if someone can do it better than I can, I am certainly willing to listen. It seems like doing it on my own will definitely save me a lot of money in fees and I’d imagine the performance of a Vanguard fund won’t be too different than one he puts me in so I’m leaning to go out on my own.
I have a Roth with Vanguard already and I do want to get the Admiral shares once I hit the minimum so I wouldn’t say I don’t care that I can’t get them with the 401, but I don’t think it’s a deal breaker. If I do it through TDA I can get the Admiral shares then or those are not available no matter what for a 401k right now?
Reading the comments certainly makes me consider TDA more. I think I will call them tomorrow and talk to them. They have all the same options as Vanguard, but with the addition of loans and low fee Vanguard ETF’s, right? Plus, Vanguard charges $20 per year, I wonder if TDA charges. Can you do Vanguard funds through TDA as well like the Life Strategy or Target dates funds or is it better to go with a TDA fund of that variety? Sorry for all the questions but I really want to just make this decision and go. I need to put the $18k employee contribution soon and then the employer contribution doesn’t have to be done until before March 15th if I’m not mistaken. I will do another $18k+ then as well. And I’ll max my Roth between Vanguard and Fidelity. I have accounts with TDA, Fidelity, and Vanguard and I like them all for different reasons., but the 401k I want to get right the first time 😉
Thanks for the answers and the great info to you and everyone here.
I don’t think you can go wrong with either TDA or Vanguard. The differences are very minor. I agree with Chris that a TDA is NOT needed with an individual 401(k).
Here’s the Vanguard paperwork: https://personal.vanguard.com/us/ElfPDFStreamPublic?ts=1447838656537
No such thing as a dumb question. If you’re wondering about something, so are dozens of others.
That link didn’t work for the Vanguard paperwork, if you don’t mind sending it again. I just got off the phone with a TDA rep and they also have a local rep not far from where I live which seems like a nice plus. He’s going to email me the paperwork to open the account with TDA so I can see what it looks like. I think I may go stop into the local office and chat with the rep there, much nicer to be able to have that. As mentioned, they have the Roth option, you can do loans, and you can buy Vanguard funds or ETF’s, etc. He did mention if I bought a Vanguard fund it would be $49.95 for each fund I buy. If I just keep loading into the same fund then you only pay the $50 one time. I asked about the Vanguard Life Strategy and Target Date funds and they had both available through TDA. Also, they don’t have an annual fee for the account (Vanguard is $20 until you reach a certain balance). Trying to think of anything else to check for?
You and a few others mentioned Vanguard being easy to open, is TDA any more difficult I wonder? I guess the question comes down to if I’m just going to do a Vanguard fund should I just do it through Vanguard. The only option I’ll be missing is the loan option if that’s the case. The main thing I want is to have outside of the 401(k) is the Roth option and both have that. It’s $20 a year through Vanguard but that should go away by my 2nd year vs the $50 to buy a Vanguard fund through TDA. It’s pretty close, but having a local office and the option to do a loan just in case might win me over. Anything else I should be plugging into my decision calculator that I’m maybe not thinking of?
The one option that sent me to TDA over Vanguard was the option to roll-over IRAs into your new solo 401k at TDA so you can avoid pro-rata taxes on your separate backdoor roth conversions. If you have no IRA, then no problem either way.
Just as an FYI, there are many Vanguard ETFs available commission-free available with TDA so you can save your $20 or $50. I’d reference WCI’s recent post on ETFs vs mutual funds, but for most of us (buy and hold investing) there’s not much difference to having the ETF vs actual fund shares.
(See the full list of commission free ETFs at TDA here: https://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp )
Thanks, Matt, I will look into those funds some more. I see they have the Total Stock market (VTI). I have VTSMX for my Roth with Vanguard already so good to see that’s a free one. In reality I don’t mind paying a one-time $50 fee if I have to for a fund that is very well balanced like a Target Date or Life Strategy fund. Like you said, “buy and hold” is my game plan. I would like to be as fierce as WCI and invest in so many different things but a one-stop fund is probably more up my alley at least for the 401k. I have my Roth in 2 different accounts/companies and I have stocks and other funds with TDA and Fidelity so I am diverse. For the 401k I want to throw a lot of pre-tax money into it and let it grow while also smiling as I don’t give it to the gov. I think TDA might be the place and will go meet the local rep to confirm as that in itself is a big plus to me.
If you don’t mind me asking, what are you invested in with TDA for your 401k?
Total Stock (VTI): 45%
International (VEU): 27%
Bond (BND): 20%
REIT (VNQ): 8%
*** Not an expert… here’s the majority of my knowledge: https://www.bogleheads.org/wiki/Lazy_portfolios
Thanks for the link, Matt. Those guys are much more bond heavy than I want to be for a while but I need to read more as I just glanced at it for a minute. But I get the gist.
The Life Strategy Moderate Growth is (VASGX):
1 Vanguard Total Stock Market Index Fund Investor Shares 36.6%
2 Vanguard Total Bond Market II Index Fund Investor Shares† 27.9%
3 Vanguard Total International Stock Index Fund Investor Shares 23.8%
4 Vanguard Total International Bond Index Fund Investor Shares 11.7%
The Target Date I would likely look at is (VTTHX):
1 Vanguard Total Stock Market Index Fund Investor Shares 49.7%
2 Vanguard Total International Stock Index Fund Investor Shares 32.4%
3 Vanguard Total Bond Market II Index Fund Investor Shares† 12.6%
4 Vanguard Total International Bond Index Fund Investor Shares 5.3%
Obviously the Target date will shuffle more towards bonds as it gets closer while I guess the Life Strategy I would need to make the change myself to a more conservative fund like the Conservative Growth if so inclined.
Try this one: https://personal.vanguard.com/us/LiteratureRequest?FW_Activity=FindLiteratureActivity&FW_Event=getliterature&vendorID=S571
I’m sure the paperwork isn’t any more difficult with TDA.
You can avoid the $20 Vanguard fee by taking documents electronically I believe. I wouldn’t believe the TDA guy that you only pay $50 one time. That would be really odd. It’s almost surely $50 per transaction per fund. But they may allow you to just use a brokerage window and buy Vanguard ETFs for less. I’d have to look into it.
Thanks, that link worked.
Yeah, I’m not worried about the $20 fee as that can be voided quickly it seems. Regarding the TDA $50 per fund, that’s what the guy told me. He specifically mentioned filling out some paperwork that once I pay the $50 for let’s say VASGX as long as I keep putting money into that same fund through the years I don’t have to keep paying every time I contribute. Of course, if I contribute to a different fund than I would pay the $50 again but wouldn’t have to keep paying $50 every time after the initial deposit. I would guess I could do Admiral shares through TDA then since it shows up on their website, forgot to ask him specifically about that.. I will find that out unless you already know you can? Again though, I may just pick a Target Date fund and go with that so I would only pay $50 one time and keep contributing to it. I have to admit though, having such a low ER like the Admiral shares would certainly make TDA that much better and very weird that you can’t do it right through Vanguard.
Talked to the local rep and you can not buy the Admiral shares as a “retail” customer, so there are companies that can through TDA but not us personally. Also confirmed the $50 per fund is correct, she said she would check on ETF’s. So once you buy a fund you fill out some paperwork and you don’t continue to pay each contribution for that particular fund. To fund the account she mentioned having to send in a check or I could bring it to her. I asked about just having my biz checking account attached and being able to just deposit that way and she didn’t think I could do that. I think you can with Vanguard and I like being able to deposit electronically so that’s a check in favor of Vanguard as is not having to pay $50 to buy their funds. She mentioned buying the ETF’s as a way to have the low ER like the Admiral shares but then you might have to pay $50 each time you contribute unlike the funds where it’s only the first time. I’ll find out if you can do the same paperwork and report back.
Interesting. Weird fee. I doubt commissions are $50. They’re probably either free or <$10.
Here’s a pdf of TDA’s fees – https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA4075.pdf
Do any of the i401k providers allow you to set up the i401k online or do they all require one to print out and mail documents in? What i401k providers allow you to make contributions online? (I believe Fidelity requires mailing in a check with a form)
I know you cannot open Vanguard’s online (or at least couldn’t when I opened mine.) But you can do all your contributions online. Super easy to do them too.
I talked to a Fidelity rep today about making contributions online. She said the “401(k) Contribution Remittance Form” is more for your own records and that they can accept payment electronically via bill pay or even transfer from an existing Fidelity account.
After setting the account up with Fidelity, I found out that you cannot fund electronically. Very frustrating. Fidelity needs to get their [stuff] together. Internally, their reps are saying different things to customers.
Last I knew, If you have a cash management account in the name of the same business as the Solo 401k, you can do electronic fund transfers (by phone) from the business account to the Solo 401k.
Bill,
That is what I do to deposit into my fidelity solo 401k.
The Vanguard fAdoption Agreement requires “Adopting employer’s federal tax identification number Required; a Social Security number is not acceptable.”
Does this mean even a sole proprietorship is required to get a tax ID number? Do all of the i401k providers require one to do that? Are there any issues/risks in getting such a number? I’ve never needed one.
Yes. Get an EIN. It’s free. No biggie. Again, I don’t know if they all require it, but I do know Vanguard does. No big risk/issue there that I can see. Seems it would decrease your risk since you’d be using your Social for one less thing.
I have a question regarding my 2015 solo 401k contribution. In 2015, I worked as an employee with my prior employer and placed 16,400 into my 401k. I started a new job where I am getting paid as 1099, the first few months, I was getting paid under my name, then I formed an LLC and is taxed as an S-Corp with an EIN. I opened a solo 401k with TD Ameritrade before December 31, 2015. As I have read I can max out employee contribution (16.4k + 1.6k from new job) and approx 20% as an employer from my self employed company. My question is, can I only contribute 20% of money I made with the EIN of my company or all 1099 money I made even before my company was formed? I already transferred funds over and feel like I may have transferred too much over and don’t want to be punished by Uncle Sam. Thanks for any guidance
20% of all 1099 money. You don’t need an LLC to have an individual 401(k) (but you do need an EIN to open one.)
Hi WCI,
Sorry, you may have answered this previously but haven’t read through all the posts. I want to know how much I can contribute to my newly opened I401K (with Etrade) for 2015? How does employee vs employer contributions factor in this?
Not enough info. The max contribution is $53K. But how much you can contribute depends on your self-employment income and whether you’ve already used your employee contribution in another 401(k).
I started this job mid-year of 2015 and haven’t used my employee contribution in any other 401k. Is the self-employment income calculated up until Dec 31, 2015? And is it a percentage of this income?
You can make solo 401k contributions from self-employment income from 1/1 – 12/31 of the plan year, but not earlier than the effective date of the plan.
The employee salary deferral max for 2015/2016 is $18K (>= age 50, $24K). The employer contribution for self-employment income is 20% (net business profits – 1/2 SE tax). The two combined can not exceed $53K in 2015/2016.
Thanks for your very helpful response. I opened the i401k at the end of 12/2015, made about 10k in 1099 income in 2015. Can I still contribute 18k + 20% (self-employer portion)? Filing married jointly and will be in highest marginal tax bracket. We are already maxed out on his profit sharing 401k and defined benefits plan. Given these numbers, what is an estimate of the employer contribution for the i401k (is it 10k-1/2(4k) assuming roughly 40% marginal tax rate)?
I mean 20%(10k-1/2(4k) for employer contribution.
Provided that you made the effective date of the solo 401k plan prior any payments, you should be able to contribute based on the net business profit from Schedule C. This will be revenue – any business expenses/deductions.
You will have to calculate your (Self-Employment) SE tax from the net business profit. This is done on Schedule SE. Then you subtract 1/2 of the SE tax from the net business profit. This has nothing to do with your marginal income tax rate.
You should really do this with tax software. It will calculate this all for you. In your example, with $10K, no business expenses and still subject to the SS portion, this amount will be $9294.
The contributions can not exceed the net business profit – 1/2 SE tax. So you would be limited to an employee salary deferral of $9294.
No. Only $10K. Actually, I’m not even sure you can put in that much. That might be decreased by SE taxes due, I’m not sure. But you definitely can’t do $18K if the business didn’t make $18K.
20% of SE income net of SE taxes. And yes, it’s income from Jan 1 to Dec 31 for almost everyone.
Hi WCI,
Wanted to drop in and say thanks for the info in your post and for answering questions as well as to the other posters who did as well. I finally opened up my i401k in late Dec with my employee contribution maxed and then I maxed the employer contribution a couple weeks back.
I set it up with TDA and bought a Vanguard MF. I then set up “systematic investments” each month with a specific amount (which can be changed after 3 months) and I’ll only have to pay $49.99 the first time. I like the idea of having commission free ETF’s I can play with as well and I think that plus the loan option is what pushed me to TDA.
Happy New Year and hopefully a prosperous one!
Glad that’s working out well for you.
Hi,
I was not employed in 2015; I worked as an independent contractor for the whole of 2015. . Can I I contribute $53000 to my individual 401 k? I made about $260k on my 1099 Misc. I also have a backdoor Roth IRS. I believe I should be able to contribute another $5500 to my Roth (via traditional IRA account). What is the last date of contributing to both 401k and backdoor Roth. Thank you.
Yes, if you made enough money you can put $53K into an individual 401(k) for 2015, but you needed to have opened it before the end of the year. If you didn’t, you can do a SEP for 2015 and open an individual 401(k) for 2016 and then roll the SEP money in there. Be aware it takes more income to max out a SEP than a solo 401(k). Remember that you only get $5500 total into all your IRAs. You don’t get a traditional IRA AND a backdoor Roth IRA. Last date for 2015 contributions is April 15th 2016.
Assuming you are a sole proprietor (almost everyone receiving an 1099-MISC are). You could almost make it with an just a SEP IRA with 20% of self-employment income (net business – 1/2 SE tax). Of course that would ruin your you backdoor Roth.
With an individual 401k you could contribute an $18K employee salary deferral and a $35K employer contribution (you would only need $175K of self-employment income)
You need to open and make a written employee salary deferral election for a individual 401k by 12/31. You have until your tax filing deadline (including extensions) to make both the employee salary deferral and the employer contribution.
Note: The employer contribution calculation and employee salary deferral deadline is different for an S-Corp.
I appreciate your prompt reply. I do have an account set up already. I was reading somewhere that I cannot put more than 20% of net income. I made $260k as gross income for 2015. You mentioned if I earn enough; is $260k enough to put in 401k? I will also be putting another 5500 in backdoor Roth.
The Roth money has nothing to do with it. If you haven’t burned your employee contribution already in another 401(k), then $260K is plenty. You only need like $190K. But if you have, then $260K is NOT enough to get $53K in there. $53K/0.20=$265K, and that doesn’t include the employer portion of SS. So in reality you need like $280K of income to max out $53K if it is all employer contributions.
In other words can I max out on individual 401k plan ($53000) with an annual gross income of $260000?
Thank you
So it seems I can contribute $53000 (18000+35000) for 2015 and have until April 15, 2016 to make that contribution. However you mentioned:
You need to open and make a written employee salary deferral election for a individual 401k by 12/31. You have until your tax filing deadline (including extensions) to make both the employee salary deferral and the employer contribution.
What do you mean when you say I need to make a written employee salary deferral election for 401k by 12/31? do you mean 12/31/2015. Who do I write to ?
Thank you
That rule doesn’t really apply much to an individual 401(k). I guess if someone demands it, you can write a letter to yourself.
An individual participant 401k is still a 401k and is subject all the rules, except you can use Form 5500-EZ when your balance exceeds $250K.
A record of employee salary deferral elections is required. These are NOT provided to the IRS, but retained in your records. Now, I don’t see how the IRS would know the actual completion date, but it certainly should be dated prior to the end of the year.
Seems like a very unlikely issue for an audit to me. How about I write “20%” on an index card and sign and date it?