By Dr. Jim 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!
So by your logic, the 20% of (net income less employer portion of Social Security) is the maximum I can contribute to my individual 401k if I have another 401k where I maxed out on elective deferral of $18000. Otherwise, I can put $53k in my individual 401k- which I believe is my situation since I was solely self employed in 2015. And I do not have any other 401 k account.
Please confirm. Sorry for going back and forth; I do not want to go through the mess of over contributing.
Thank you
Yes, if you have no other 401(k) or 403(b) and you made over $180-$200K, you can put $53K into an individual 401(k). $18K is an employee contribution and the remainder is employer contribution.
Thank you very much for clarifying.
Prior two years I used CPAs to file taxes (2013 and 2014 tax years). In 2013 I rolled out all funds in my wife’s Contributory IRA into (backdoor) Roth IRA and consequently, paid taxes on the growth portion only (the remaining contribution was already post tax money due to our combined income bracket). In 2014 I made another 5500 (post tax)contribution into the contributory IRA account, and rolled it out into Roth IRA in the next few days- so no growth or taxable part on that 5500. However, when my CPA filed for 8606 for tax year 2014, he still showed a taxable income – which I believe is wrong. I rolled out money in 2013 and already paid taxes on the growth component and 2014 contribution was rolled out in a few days with no growth.
If it has been a mistake, how do I correct it this year in 2015 tax filing. Are there any consequences if I do not correct it ?
Thank you.
If your CPA did it wrong, which is surprisingly common with an 8606, then it is worth correcting with a 1040X. Your CPA should do it once you point out the error, but it isn’t that hard to do yourself. The main consequence is you would get a couple thousand back from your taxes. If you don’t want it, well….
You have uploaded a typical 8606 for someone doing it for the first time. It will really help if you could upload/share another 8606 form for someone who has already done it for say 2013 and 2014 and is going to put another $5500 for 2015 tax year. It will be very helpful for those trying to do taxes themselves.
Thank you
My 8606s look pretty much the same every year. I think the one you’re looking for can be found in this post:
https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/
In other words, these plans might be this, and they might be that, and the writer don’t have the slightest idea what any of them actually are until a reader goes and does his research for him. What’s the point? If the writer can’t be bothered to make a couple of phone calls before putting this piece of clickbait out there, why does anybody read it?
Yea….and comment on it!
Seriously though, some of these things are a moving target and as you can tell from the comments section, even reading the material from the companies and calling them doesn’t always give you the same answer.
The post is fine.
A funny thing with Fidelity (maybe others) solo401k is you cannot fund electronically using ACH. I actually had to mail in contributions when I had a solo 401k.
Interesting and the same with TD Ameritrade. I was able to use “bill pay” thru my bank and it’s done electronically though . . . not sure what the issue is . . . .Not the case with Etrade and Schwab: used to have 401k accounts there and was able to contrib via ACH.
Actually, you can make an electronic payment on Fidelity. It is just not obvious nor easy.
You can fund electronically (by phone) from a Cash Management or Brokerage account in the same business name as on the 401k. You can not do it from a personal account or online.
That is annoying. I do use ACH with my Vanguard solo401(k).
I’m wondering what the rules are regarding spouses on a solo 401K. If I am a sole proprietor, then I am able to open a solo 401K for myself, but it also appears that I can open one for wife, correct? And if, in theory, she was a sole proprietor in a business unrelated to mine, then can she open a solo 401K for that business and open one for me as well. Does this mean we could each technically have two solo 401Ks?
If your wife legitimately does work in your business then yes, she can have a solo 401(k). However, if you own a business and she owns a business and you both work in each other’s businesses, then I think those businesses probably fall into a controlled business situation and you would only get one solo 401(k) total.
Yes, WCI is correct. Due to family attribution rules, each spouse would also be consider an owner of each other’s business.
Also, technically a business adopts a single solo 401k plan and the two spouses would have separate accounts.
This would be a controlled group with only one employee salary deferral limit and annual addition limit per spouse across both businesses.
Im still grappling with which 401K plan to choose. I want to rollover an old 401K into the solo 401K. You mention that Vanguard doesn’t allow IRA rollovers, but what about 401K rollovers? And if you qualify for Vanguard Voyager status, are you better off going with Vanguard and paying the investor level ERs, or going with Schwab or Etrade and getting a lower ER but paying a trade fee?
I don’t think they allow 401(k) rollovers either, but I’d ask them if it is a critical point for you. I don’t see what Voyager has to do with anything. Whether higher ERs or the commissions are better comes down to how much you have invested. If it is hundreds of thousands, the ER is more than the commissions. If it is a few thousand, better to pay the higher ER.
I have a traditional IRA at Etrade that I need to get into a solo 401k so I can do a backdoor Roth.
I also would like to have a solo 401k for my retirement savings from 1099 work. I was happy to read this thread because I thought perfect – will get a solo 401k at ETrade and kill two birds with one stone.
But then I called Etrade who told me that I could not transfer my own traditional IRA into a solo 401k there!
I think I might call again tomorrow to see if I can get another agent…. anyone else run into this?
Hmmm . . . .that’s odd. In 2009, I rolled over my Merrill SEP-IRA to my Etrade 401k without any difficulty. Can’t imagine that’s changed unless they have amended their turnkey plan document without my knowing it.
So yesterday I read through this blog post and comments. Initially I was going to open up a Solo 401(k) at Vanguard — the paperwork is so easy to follow, mostly, and quite consumer friendly. But then, after the blog post/comment read I thought I should do TD Ameritrade instead, so I tried to find the paperwork there — it is a mess.
TDA doesn’t even have the right forms to send you. I had to call this morning, only to have the customer service person tell me I needed a 3rd party administrator. When I said that wasn’t true, then he changed his tune and said that he had to e-mail me the paperwork because the online team had mistakes online. So, I got the e-mail, and there’s no less than 12 pdf’s in gobbledy gook legal language with no instructions. I’m supposed to sort through all that and figure it out. The customer service guy said there’s a rep 30 min. away from me that I can visit if I need more help. So annoying.
The bottom line that I’ve concluded from the comments on this blog post is that TDA would give me more fund options including the ability to invest in Vanguard, which seems like a good thing. But, the lingering question on that was that it does appear that TDA charges ~$44.99 to invest in a no load fund — don’t know if that’s the same with Vanguard on the back end?
I can figure out how to fill out the forms, but it’s the backend pros/cons on costs that I still feel I’m not sure which company to go with.
Found out more —
– Vanguard: The customer service is yards better at this company than TDA. There is a direct line to experts in i401(k), 1-800-992-7188. The employer packet is super consumer friendly. You can only invest in Vanguard funds. $20/year/fund account fee that you invest in. You are not charged the $20 each time you deposit. If you have $50K across all qualifying Vanguard accounts with them, then you get the $20/year/fund fees waived. You can see the investor share class funds that are available by going to Vanguard’s site: Investing > Investment products > Vanguard mutual funds > Choose your funds > Fund categories … then choose filters and “Low-Cost Investor Shares.” You can further filter out the minimum investment categories — they waive the minimum investment requirements for funds with $1K and $3K minimums. I can transfer my SEP IRA and Roth from T Rowe Price to Vanguard to take advantage of Admiral Shares and get closer to the $50K mark to delete the $20 fees across all accounts.
– TDA: Poor customer service. No direct line for i401(k)’s. A mess of paperwork that isn’t clear what to do. No annual fee for the i401(k). More investment options, which is a plus for some people. There’s no fees for their TDA Premier List of investment funds, but they don’t list those funds on the TDA site — maybe those funds are listed elsewhere on an outside site — possibly here: https://www.myplaniq.com/LTISystem/f401k_view.action?ID=679. For all other no load funds (like Vanguard) outside of the TDA Premier List you are paying $49.99 per transaction/deposit/fund UNLESS you site up for an auto/recurring deposit and then you still have the entry $49.99 fee. Do not know if they waive the per fund fee for non-Premier List if you have X dollars across all qualifying TDA accounts.
At this point, with my needs, I’m more sold on Vanguard. It’s more simple, less hassle, better customer service, and the costs appear to be less for what I want to do.
Sarah,
I went through your process and was a little annoyed with TDA and how they sent me the paperwork and even how slow they were to then process it. But I chose them for the reasons you’ve read in ITT such as loans, brokerage, etc.
Regarding your second post, someone can correct me but you cannot get the Admiral Shares with Vanguard in your 401k. Yes, I paid $49.99 for the Vanguard MF that I chose from TDA, but I set it up for systematic investments every month and will not pay that fee again on that fund. I also picked up some of their commission-free ETF’s already and it’s been nice and easy.
But you can’t go wrong with Vanguard if you simply want to buy their MF’s and will never need a loan or other types of brokerage services.
That’s been my take. Yes, it sucks a bit to pay an extra 10 basis points for fund ERs, but I haven’t needed the rollover feature (I have two other 401(k)s with that feature) and Vanguard has the Roth feature if I ever want it.
10 basis points on even a half million is only $500 a year. Not sure how many hoops I want to jump through to get that, especially when the alternative is to pay $50 a fund and then be limited in how I can move funds around within the 401(k). Plus, I’m hoping Vanguard eventually relents and allows admiral shares in the individual 401(k).
Sarah100w – huh, that’s a shame about your experience with TDA. I have several other accounts with TDA and also weighed various options re: which brokerage to open my Solo 401k with — I looked at TDA, Vanguard, Etrade, Fidelity, and a few others. Decided to go with TDA for simplicity and because of their zero fees, lots of fee-free ETFs, and availability of a Roth option.
I even wrote a blog post documenting the whole thing, including which forms to fill out (admittedly, they sent a ton, but only 2 matter), and exactly how to do it. I do think TDA is a good option if you’re planning to self-manage and don’t need a CFP. Encourage you to check out my post covering the TDA application process via the link next to my name. (And, no, I’m not getting compensated by TDA or anyone else to write this.)
Andrew, read my post above (“Chris | May 24, 2016 at 11:34 pm”}. My TD experience has been a disaster. Ranging from bait/switch offers/probable fraud, erroneous charges, less than responsive customer service, dishonesty.
Have been working through the details of the Solo 401K plans and just read this post today which has been great. Currently have both an SEP and Roth IRA through TDA. Looking to stay with them and have a few questions to work through on that decision.
I have some partners who have moved money in their Roth IRA retirement accounts over to Equity Trust and have dealt in Real Estate and Note investing with this and have had positive experiences with this type of retirement account investing. Am interested in having an Individual 401K along with a 401K Roth and loan options which TDA allows for. I have found some TPAs who will help with setting up your plan with TDA with differing levels of maintenance fees and help with yearly IRS / DOL form filings. For those who have their plans with TDA, has anyone invested outside of the market in real estate and how has that experience been as far as the process and paperwork and customer support?
As far as funding my Solo 401K with TDA, I understand there is an option of rolling over my SEP IRA to fund this plan. Are there any advantages or disadvantages of doing a partial or full rollover of my SEP IRA into this new solo 401K or must you rollover the entire account from the beginning? All new contributions will be made to the solo 401K and solo 401K Roth and overall investment choices are greater with the Solo 401K but am not sure if there is a good reason to keep the SEP IRA at all.
I established a Roth IRA during residency back in 2001 and want to keep that. Have been unable to make further contributions to that account and have been investing solely through the SEP IRA. With the solo 401K Roth, if I understand correctly I can now contribute to this type of Roth retirement account with the option of rolling that over at a later date into my existing Roth IRA to avoid future RMDs – is this correct? I believe one can contribute up to $18000 a year ($24000 if over 50) into a 401K Roth. Am assuming the total that I could invest per year in my Solo 401K/Roth 401K combined would be $53000 ($59000 if over 50) – correct?
The term 401K Trust is one that’s new to me and with the information I’ve seen on TPA sites this term is used. Is there a difference between a Solo 401K and a Solo 401K Trust account or are these the same?
Thanks for your help!
I don’t know if TDA allows their individual 401(k) to be invested in the non-typical brokerage stuff like mutual funds, ETFs, stocks, bonds etc. It sounds like you might want a self-directed individual 401(k), and I’m not sure TDA offers that.
The advantage of rolling over a SEP IRA is to be able to do a backdoor Roth IRA each year. No reason to keep it after you roll it over.
You absolutely can make further contributions to a Roth IRA. More details here: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Remember you only get one employee contribution to a 401(k) each year ($18K if under 50) no matter how many unrelatd businesses/401(k)s you have. Only the employee contribution can be Roth.
If you only have on 401(k), the total is $53K if under 50. More details here: https://www.whitecoatinvestor.com/multiple-401k-rules/
The IRC calls a 401(k) a “Retirement Savings Trust.” Maybe that’s what it is referring to. So I think it’s the same. Although you can make a trust a beneficiary of a 401(k). More details here:
https://www.sensefinancial.com/services/solo401k/solo-401k-basics/
I only have a 457 available from my employer so I am maxing that out at $18,000. I am going to do back door Roth’s for both me and my wife this coming week. My wife has an LLC that will probably make around $25,000 this year. Please correct me wrong but I should ask her to open an individual 401K and she can contribute $18,000 and then 25% of any remaining profit to it? I assume the “employer contribution” is made after the first of the year?
No, it’s $18K + 20% of everything she makes. On $25 net profit, the contribution could be almost $23K.
When the self-employment income is only a small amount above the maximum employee salary deferral, there is an additional limitation that comes into play. The employer contribution is limited to 50% of (self-employment income – employee salary deferral).
With a net profit of $25K, the self-employment income is $23,234. The nominal employer contribution would be $4,647 ($23,234 * 20%). However, it is limited to $2,617 (0.50 * ($23,234 – $18,000)).
Interesting. I haven’t seen that before. Do you have a link to a source?
IRS Publication 560, Retirement Plans for Small Business, Chapter 5, page 23. Deduction Worksheet for Self-Employed, steps 11, 12 and 13.
Thank you.
I should add that the reason for this is related to why a sole proprietor uses 20% of their net earnings from self-employment (net -business profit – 1/2 SE tax) for a maximum employer contribution instead of 25%.
The maximum employer contribution is actually 25% of compensation (the same as a W-2 employee). However, the employer contribution is not compensation and must be deducted from the Net Earnings from Self-Employment (NESE) to get compensation. This is then (NESE / 1.25 * 0.25) or (NESE * 0.20).
The maximum 415c annual addition limit is $53K or 100% of compensation. Using the compensation limit, the employer contribution is limited to compensation – employee salary deferral. Since the employer contribution itself must be deducted from the NESE to arrive at compensation, the contribution is limited to 1/2 (NESE – employee salary deferral).
What about this scenario: I will have about $70,000 in 1099 income for 2017 before switching to a employment/W2 job in March 2017. Does that mean I could contribute ($18,000 salary deferral) + (20% x $52,000 employer contribution) to my solo 401k?
Depends on what you contributed to the 401(k) at the new job. If nothing, then yes, you could put your employee contribution into an individual 401(k). And it’s $18K + 20% of $70K up to a total of $54K for 2017.
Thanks JD for the post and your blog, I just found it recently when I decided to educate myself more and am looking for some advice. I’m a dental resident and my wife is a pathology resident.
We are each contributing a little to our respective residency 403(b) plans. I am the only one currently with a Roth IRA. I’ve been maxing that out for the last couple years when I’ve been able to do so.
In the next few months, I will be starting a moonlighting job, getting paid as a 1099. And I will have some more money to invest. I’m trying to figure out how best to invest my money.
I was planning on maxing out both Roth IRAs at 11k.
Then opening a solo 401k with Vanguard and funding that a bit. I plan on eventually rolling over my 403(b) into my solo 401k.
Does that sound good? I want the option to do backdoor roths in the future.
Also, I’m not sure if I quite understand the employee contribution part. If I put in 3k into my 403b does that mean I can put in 15k into the solo 401k?
Sorry about the basic questions. Just starting to wrap my head around this. Thanks
$15K of employee contribution plus your employer contribution (~ 18% of gross.)
currently I have my 401k in a Chase traditional IRA in a cash position. I would like to transfer the funds to a provider that can help me buy real estate are there any recommendations?
You do not have your 401(k) in a traditional IRA. A bank is also a lousy place to hold an IRA as it is usually in a cash position paying a very low rate of interest.
But it sounds like what you’re looking for is a self-directed IRA. There are many folks out there offering them but I’m not sure I have a great recommendation in that regard.
I have a roth401k with a job I just left. Weak MFs but my understandng is the asset protection of 401k is superior to solo 401k. I need my tIRAs gone too, but into a solo401k also exposes those assets. So for asset protection 401k>IRA>solo401k>taxable- yes and how so?
Cant you have a 401k at VG, an SD, one at Fido? Rules for total self-employer side funding apply, but you can distribute among them right?
Is it too late for 2015 tax year extension, for any solo/sep/other type tax shelter? THANKS
Asset protection law is state specific. Have you looked up your state’s laws? Do individual 401(k)s really have less asset protection in your case than an employer’s 401(k)? Better check before making decisions based on that.
And individual 401(k)s get at least as good of asset protection as IRAs in every state that I know of.
I would not fund more than one solo 401(k) for your business for any given year.
It is not too late for a SEP, but it is too late for an individual 401(k).
OK–so I called Vanguard and wanted to ask them A. Can I have 2 solo 401Ks (mix between TD and Vanguard) and she said the following–YES if you MAKE your own “plan”–which has to do with some kind of document you yourself or your lawyer writes up). NO if you have the document plan from TD or Vanguard. SO I was multitasking at that moment and burnt out so I did not write down the name of the document you have to make. So YES-it is doable but yet another chore. B. I asked if I can transfer my TD solo to Vanguard and she said YES no problem as that is not a roll-over but a transfer. I hope that answers everyone’s questions. BTW at this point I think I will stick with TD and try to learn how to DCA and rebalance the free ETFs and if it seems like it is taking too much of my time I will transfer.BTW customer service is much smarter/more knowledgable at Vanguard though I have an N of like 4….so take it for what it is worth.
Hi Everyone, very great comments – I read everything from top to bottom – This is my first post ever on this website, thank you white coat for maintaining this website of advice, you are a role model to all of us!
I am trying to see if I can get advice from the seasoned investors.
I just graduated from residency on June 30th and am starting a position as a hospitalist on Aug 1 with base 240k and approx. bonus of 60k plus 35k signing bonus. Unfortunately, my new W2 job will not allow new employees to be a part of the 401k program until AFTER 12 months of full-time work.
My gross W2 salary from Jan 1 to June 30 from residency for 2016 will be about 28.5k. I will have no income for July. I am guessing my W2 salary with bonuses for Aug 1 to Dec 31 will come out to about 125k. The sign on bonus will add another 35k. And I am planning to do some locums on some of my weeks off once I have settled in to my attending life probably around October or November. I am guesstimating I will work like 15 locums shifts for a 1099 gross income of about 28k for the rest of the year.
In old retirement accounts, I have about 30k in a Brokerage IRA account at Chase and another 6k in a traditional IRA at Vanguard. From Jan until my graduation in June 2016, I have two accounts at Fidelity from residency; 403b with employee contribution of $461.55, employer contribution of $798.77. 401a with employer contribution of $1118.31.
Question 1, is there any way I can stash any of my W2 money into any retirement accounts to lower my tax burden for the year. I know we can all do $5,500 for either traditional or backdoor Roth. Is this my only other option for this year? And more than likely, I will have to do backdoor Roth since my modified AGI will be greater than the 132k limit.
Question 2, does my 403b and/or 401a from earlier in the year from residency influence what I can do with an individual 401k? If my 1099 income target is accurate and the 403b/401a from earlier in the year doesn’t mess with the calculations, I will be able to contribute about 23.6k (i.e. 18k plus 20% of 28k) into an individual 401k I think.
Question 3: if I understood all of the advice correctly, I can rollover the 30k from my Chase IRA, the 6k from my Vanguard, and the 11k from my Fidelity 403b/401a to an individual 401k to avoid paying taxes on it now to start doing the backdoor Roth IRA this year going forward? Is there anything I am missing in terms of me being in line to do the backdoor Roth with this plan of just rolling all of these accounts into the i401k? I am trying to decide whether to open this solo 401k at Ameritrade vs Etrade.
Question 4, does anyone have any advice or suggestions for any other ways I can minimize my tax burden and maximize my post-tax dollars that I am missing? I am planning to take advantage of the Public Service Loan Forgiveness Program so it is helpful to keep my adjusted gross income as low as possible to minimize monthly federal student loan payments but I realize that there might be better long term strategies that I am overlooking. I’m excited to finally be done but now it’s a whole different world.
Thank you all for any advice!!
1. No. You don’t mention marital status, but since you had the 403b this year, I don’t think you can deduct the IRA contribution. So you might as well do a backdoor Roth IRA. In fact, I’d convert all that 403b and the 401a if they let me roll it over to Roth as well. Your 1099 income, however, could be used to fund an individual 401(k).
2. Only slightly because you barely put anything into it. $17.5K as an employee contribution + 20%.
3. Oh, it’s a Chase IRA. You mentioned it was a brokerage account earlier so I assumed it was taxable. I have no idea where the $11K in the 403/401a came from. But yes, that can all go into the individual 401(k) that must be opened by the end of the year. I think I’d do Etrade if I had it all to do over again.
4. HSA maybe?
Recently WCI mentioned in the “selling half the business to my spouse” thread that he and his wife both make contributions to their Individual 401k, but that they also pay their kids and the kids make contributions to their own Roths.
How can this be? The Individual 401k doesn’t allow for common employees?
Thanks for any thoughts on this. Apologies is this has been covered in the thread, but I couldn’t find any direct response to this situation.
The kids have Roth IRAs, and being part-timers, are not eligible for the 401(k).
An individual participant 401k can not have “eligible” common law employees.
However, like any other 401k, they can exclude anyone < 21 and/or with < 1000 hours/year from eligibility.
Thanks for clarifying! So just so I understand, with kids I’ll still have to declare them employees, play FICA, workmen’s comp, etc., because they can’t be treated as independent contractors? But even if pay all that, they’re still exempted from the 401k? Thanks for helping with this.
You don’t want them as ICs. You want them as employees. Kids/You don’t pay FICA or WC when they work for you.
I am between fidelity and vanguard for setting up my individual 401(k) and noticed something on the vaguard site that no one has mentioned from what I can tell (and I may be reading it wrong, who knows). It says the following:
“$20 per year for each Vanguard fund held in a Vanguard Individual 401(k) account. If at least one participant qualifies for Flagship Select™, Flagship®, Voyager Select®, or Voyager® Services, the account service fee will be waived for all participants in the plan. However, if the plan administrator is the only person enrolled in Flagship Select, Flagship, Voyager Select, or Voyager Services, but he or she doesn’t participate in the plan, the fee will apply.”
$20/year for each fund? That seems like a lot to me. I confirmed with Fidelity that there is no yearly fee. Am I missing something here?
I think that’s the fee that is waived if you take electronic statements, no? At any rate, I probably ignored it since you get Voyager at $100K. Shouldn’t take long to do that with an individual 401(k), a backdoor Roth or two, and maybe even a taxable account.
Thank you for all the excellent information on Backdoor Roth’s as well as Individual 401k’s!
My wife (non-physician, self-employed) is about to open an Individual 401k somewhere other than Vanguard (which we otherwise use a lot) so that she can rollover her Vanguard SEP-IRA into it for the purpose of being able to do the Backdoor Roth conversation (as you have explained so well).
My question is simple:
Why is T. Rowe Price not mentioned as a recommended place to open an Individual 401k, either by you or on the link you included with expanded options for where to open an Individual 401k?
I ask because I’ve been using T. Rowe Price for our College Savings Account (the Alaska College Savings Account), and like the company well. My father (a former financial professional, who uses Vanguard for almost everything) also recommends T. Rowe Price as an alternative to Vanguard (over Fidelity, for reasons unknown to me).
So … is there something undesirable about T. Rowe Price that I may not be aware of?
Thank you!
Many of us here do not believe in trying to beat the market, because fewer than 20% of funds do so and how do you always pick that small number that do. The path to investment success is slow and steady and not under performing the markets.
So we invest in broad market index funds and/or ETFs. The reality is that Vanguard, Fidelity, TD Ameritrade, Schwab and Etrade are simply less expensive.
This is not to say that T. Rowe Price is a bad choice. In fact, they have some really good funds with below average expense ratios for active funds. If your investment strategy is based on active management, there are far worse choices.
Personally, I didn’t use them due to their investment choices. At the time I was looking, they only offered their own fund line up. The majority were actively managed and the expense ratios were all quite high (all over 0.5% and many over 1%). Given there are so many other cheaper and better options, I decided to go elsewhere.
I need some advice. I have taken an employed job that does not offer a retirement plan. I plan on opening a solo 401 when I can obtain 1099 money. In the mean time, I want to invest what would be the same amount as I could to max a 401/403. What is the best way to go about doing this? What type of account should I use?
If you have no tax-advantaged accounts available to you (401(k), 403(b), Individual 401(k), HSA etc) then you are stuck with a Roth IRA (through the backdoor if necessary, or even just a traditional IRA depending on your circumstances) and a regular old taxable/brokerage/mutual funds/investing account.
I read your book and appreciate your efforts to get all of us up to snuff on the continuing financial education. This stuff is so important. Question regarding retirement accounts.
My profile: Single 32 yo, recent EM grad, currently working 3 part-time jobs. W2 employee for two (in CA) and 1099 independent contractor for the other one (in TX). No employer benefits with any of the jobs. Total income with all of the jobs ~150K.
-I have 20K sitting in a 457b retirement acct from residency through Prudential.
-One of the W2 jobs requires me to have/contribute to a 401a Defined Contribution plan (through Fidelity).
-I recently opened up an HSA (through HSA bank) to use as a stealth IRA.
-I plan on using Vanguard index funds and bonds re: investing strategy.
I want to be able to utilize the back door Roth but currently have a few balls in the air, as you can see.
I plan on opening a Roth IRA, 401(k), and a non-deductible traditional IRA.
Which company would you suggest to open above-mentioned accounts that would allow me to invest in Vanguard funds with minimal fees and the ability to do rollovers?
Am I still going to be able to do the back door Roth given that I have the required 401a?
To which of the accounts should I rollover the 20K in the 457b? I know if I roll that 20k into the Roth, I’ll be taxed now. Is there an advantage to rolling the 20k into the 401(k) or non-deductible traditional IRA?
Thanks in advance!
I like Vanguard, but I’m not clear on what rollover you need to do. I’m not seeing a rollover that is required in order to do a backdoor Roth IRA.
Yes, the 401a limit won’t affect the backdoor Roth IRA.
I don’t know that the 457b is going to allow you to do a rollover to any account. Have you read the plan document? If it allows you to roll it over into an IRA or 401(k) that’s great, but it probably doesn’t.
Thanks for your quick reply!
The rollover I was speaking of was the 457b money from residency (through Prudential) into a new retirement account (traditional IRA vs. SEP-IRA vs. solo401K). I’ll talk to the Prudential folks to figure out what kind of account I can roll this money in to. This is solely to simplify things and get that 20K out of an account that I can no longer contribute to.
Was looking into the Roth options. Do you think it makes sense to get a solo401K with a Roth 401K (this is available via Etrade and Vanguard) and scrapping the back door Roth conversion altogether? Trying to simplify things where I can. If I don’t get the Roth 401K, then from my reading, sounds like I’ll need to open a non-deductible traditional IRA, Roth IRA, and solo401k to be able to do the back-door Roth conversion. Is that right?
I just spoke with a rep from Northwestern Mutual. Their pitch: 1.65% to manage my portfolio. They also suggested SEP-IRA+whole life insurance as a tax-free shelter to accumulate equity that is not tied to the market. Don’t worry, I know how you feel about whole life ;-). She said that the paperwork is more complicated for a solo401K and there are more administrative costs compared to a SEP-IRA. I know that you prefer the 401k to the SEP-IRA. Any veracity in the argument of “the solo401K is more expensive and the paperwork is more complicated”? Can’t help but feeling like I’m being ripped off by NWM.
Some 457bs can be rolled into IRAs, but not all can. So read up and find out if yours can. If it can, you can do so to simplify things, but it will give you Backdoor Roth IRA pro-rata issues. So you’ll either need to then convert it (and pay the taxes) or find a 401(k) to roll it into. Might be easier to leave it in the 457 but I’d try to get it out if I could.
Yes, I think a solo 401(k) is worth the very slight additional hassle and paperwork in order to make larger contributions (sometimes) than a SEP-IRA and especially in order to avoid pro-rata issues and do the Backdoor Roth IRA.
I would not pay a NML insurance agent masquerading as a financial advisor 0.165% much less 1.65% to manage my money. I also wouldn’t hire anyone to manage my money who recommended whole life insurance or a SEP-IRA to a high-income professional at the “pitch meeting.” Trust your feelings young padawan.
Thanks, Jim. I really appreciate it.
Gonna pursue the solo401K+Roth 401K through Etrade (https://bit.ly/2jyyNUp) and scrap Northwestern Mutual. I’m not afraid of paperwork. I mastered the skill of endless paperwork on my IM rotations in residency ;-).
Appreciate everything!
Remember the Roth 401(k) is just a sub-account within the individual 401(k), not actually a separate account.
Thank you for the write-up. I have an LLC for side projects and also work full time. Can I have both a solo401k and 401k from my reg job?
Yes.
https://www.whitecoatinvestor.com/multiple-401k-rules/
Hi everyone. Have a few questions. Thank you in advance.
1. Setting up a solo 401k now. Considering Fidelity. Find them to have great customer service and excellent access to funds and ETFs while trades are now only $4.95, as well. That said, you CAN’T deposit through payroll or your business accounts electronically. You literally have to mail them a check every month. Yes, you can use an automatic bill pay system, but this is almost a deal breaker for me. Does anyone know if you can do electronic funds transfers with Schwab, TD Ameritrade, Etrade?
2. I already have a SEP-IRA setup. Can I contribute to both a SEP and and a solo 401k in the same year? If not, and I choose to only contribute to the solo 401k going forward, can I roll my SEP into it?
3. Outside my S-Corp I’m still a w-2 at another hospital and a have 403b. Can I roll my 403b into my solo 401k while still an employee? If so, can I do this on a yearly basis?
1. I don’t know about Schwab, TD Ameritrade, or eTRade. I know you can with Vanguard, but looks like you’ve already ruled them out.
2. No. One or the other and the solo 401(k) is better. So roll your SEP in there. Make sure your 401(k) accepts rollovers (Vanguard’s doesn’t.)
3. No, usually not. But read your plan document to see if it allows “in-service rollovers.” Occasionally a plan does.
1. I do know the answer as of April 2016. TDAneritrade is a NO. Schwab is a YES but if you want a ROTH option, you’re out of luck. ETrade is a YES, they allow a ROTH option and electronic transfers from different accounts. Vanguard is a YES and has a ROTH option but no brokerage option (for ETFs).
2. Yes you can contribute to both but I don’t see any advantage to it if they are from related or the same business activity, the total contributions of BOTH accounts can’t exceed $54k ($60k if over 50). You are limited to 20% of self-employed income in an SEP were as in a solo 401k, you can contribute 25% of self employed salary and $18k elective deferral (same total limits as above). This allows greater savings if your Self employed income is lower.
3. Whether you can roll over your 403b into a Solo 401k depends on both plan documents. Your current 403B document has to allow for in-service rollovers. Your solo 401k plan document has to allow for direct rollovers and transfer into it. For example, ETrade and TDAmeritrade allow direct rollovers/transfers. Vanguard does not. I don’t know about Schwab.
That’s my understanding . . . of course, I ain’t an expert and am open to correction from some of the others on the site.
Unless you’re an S Corp, it’s 20%, not 25% of self-employed income into an individual 401(k) (plus the $18K employee contribution if you haven’t used it elsewhere.) As an employee of an S corp, it’s 25% of salary (but you have to have enough “non-salary” to pay the contribution, so it’s usually the same percentage of earnings.)
Thanks for the quick replies. Super useful answers, some of which made me reevaluate Fidelity. It’s a great company but I think for a Solo 401k eTrade is the move. Their flexibility with traditionals, roths, loans, and their EXTREMELY open rollover policies just make sense if you want flexibility going forward. Trades are higher cost, but I’m mostly going with NTF mutual funds, so not too fussed about it.
Wish I had started a solo 401k before the SEP, but this forum is so helpful in understanding these choices. Cheers to everyone.