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!
No problem. It even gets a little better when your account balances get up there. When the sum total of all my accounts hit $1,000,000, they assigned me a personal representative and tossed in a couple extra bonuses. My ETF and stock trades are now free (too bad I don’t do many) and I have access to the entire lineup of Vanguard Funds, ADMIRAL class, for use in my 401k, Roth 401k and brokerage accounts. I get 20 free mutual fund trades per year and it’s $20/trade thereafter . . . . more than made up for by the lower expense ratio of the Admiral shares.
Chris, those are some awesome perks! My balance is nowhere near that yet. I just opened a solo 401k and Roth 401k through Etrade, balance is around 20K. At this point, I don’t have the option to purchase Vanguard Admiral fares. When I look up the ticker for Vanguard Index 500 Admiral shares, I get a message stating “this fund is not available for purchase through Etrade Securities”.
I’m satisfied except for one thing. I’m interested mostly in Vanguard mutual funds and there’s a $19.99 cost per trade for Vanguard funds. Is there a way to avoid the $19.99 charge to invest my monthly contributions? If not, it doesn’t seem worth it. Other than that, Etrade is awesome. They allow electronic transfer of funds from my checking account, rollovers, have an awesome smartphone app, and have many funds that are no load, no transaction fee. Interested to know if anyone knows of a work-around to this issue re: Vanguard mutual funds.
Cheers,
Kara
Kara,
No work around with the mutual funds that I know of. In your case, if your heart is set on Vanguard products, you could just stick with the Vanguard ETFs. The transaction fee is only $7 (versus $20 for mutual funds) per trade and the expense ratios are lower than the Investor class and almost as low as the Admiral class (Example: 500 Admiral, 0.04%, ETF 0.05%, Investor 0.14%). The trading volume is high enough so that the bid/ask spread, most likely, will be an insignificant factor too. The nice thing about the fee wars going on now among the discount brokerages is that trading costs are becoming less and less significant.
Thanks WCI for all the valuable information.
Question about setting oneself up for using a Solo 401K.
I am part of a physician-owned group where I am paid through a W2 and everyone maxes the 53K contribution to a 401K as a nonelective employer contribution, so I don’t believe I’m using any of my 18K employee contribution limit.
If I begin to take on separate consulting or legal expert work, I gather that I can contribute 100% of the first 18K of that money (“employee contribution”) to a solo 401k, and then 18-19% of any money I can make beyond that (“employer contribution”, second unrelated employer).
Question is, what do I have to set up in order to do that?
Can I do it just as an individual person receiving 1099 income?
Or do I need to incorporate as Joe Smith Consulting first (pretend my name is Joe Smith) , and then pay myself with a 1099 from Joe Smith Consulting? Does that then obligate me to figure out how to pay payroll taxes and file corporate tax paperwork every year? Have a separate bank account registered to Joe Smith Consulting, deposit checks from my consulting work into that account and then issue a check from Joe Smith Consulting to Joe Smith? And then set up a solo 401k in the name of Joe Smith? Or in the name of Joe Smith Consulting?
I’m otherwise uninitiated in the world of LLCs, sole propriotorships, S corps, and C corps, etc and would never have been interested in them other than for the possibility of shielding some additional income for retirement.
In addition to the 53K (54 this year) to my group 401k, a backdoor Roth, and my kids 529 account, I still have financial room to put more away if legally possible.
Thanks!
Yes.
No, you don’t have to incorporate to use an individual 401(k).
I would get a separate bank account for your business, but you don’t have to.
A sole proprietorship doesn’t have to “do payroll” but you will owe payroll taxes. They just get sent in as part of your quarterly estimated taxes.
The 401(k) should be in the name of the business, which might be just Joe Smith.
I’m not hearing a reason for an LLC or corporation here, but if this business makes A LOT, you could form an LLC, having it taxed as an S corp and save some Medicare taxes on the amount above and beyond what you have to make to max out the individual 401(k).
Remember you can always save in taxable.
Also, be DARN SURE that your employee contribution isn’t being used up at your W-2 job. It usually is.
If you are maxing out employer contributions ($53K) as a W-2 employee, that means your W-2 salary is >= $265K. You will already have more than maxed out the SS max wage base (2017 = $127,200).
It can actually be counter-productive in such a case to use an S-Corp or LLC/S-Corp. You will likely actually pay more in FICA taxes as a W-2 employee than the SE taxes you would pay as a sole proprietor/LLC.
An S-Corp or LLC/S-Corp allows you to pay a reasonable salary and take some of the income as a distribution. However, all W-2 employers must deduct the full FICA up to the SS max wage base.
While the excess employee share (6.2%) of the SS component (12.4%) is refundable on your Form 1040 return. The employer’s share (6.2%) is not recoverable. So you will end up paying an extra 6.2% on the first $127,200 of W-2 wages to save 2.9% on any distributions.
The net effect is that you will pay more in W-2 FICA taxes than you would in self-employed SE taxes.
In a moonlighting situation where the primary W-2 employment is >= the SS max wage base (2017 = $127,200). You will pay more in FICA taxes as a W-2 employee for the moonlighting business in an S-Corp or LLC/S-Corp than SE taxes as a Sole Proprietor/LLC.
The S-Corp W-2 shareholder-employee is still subject to full FICA taxes. The employee share of the SS component (6.2%) is refundable on Form 1040. The employer share is never recoverable. While the self-employed SE tax will not be to subject to the SS component (12.4%) at all.
TD Ameritrade’s solo 401K plan as of 3-23-2017, is a trading account so EFTs are available, does allow for a ROTH option, does allow for loans, allows for rollovers of 401Ks and IRAs. I just opened one. At the time, my research included a call to the customer service line and they did not believe that a ROTH option was allowed, but in the process of actually working with the new accounts line, I learned that they DO allow a roth option in the solo 401K plan.
I’m a happy camper.
Sounds like TD Ameritrade may be the best of these for now. I do like my TD Ameritrade/HSA Bank HSA. Not sure they’re better enough to move my Vanguard one, but if I were opening one today, I’d certainly consider it.
Just wanted to provide feedback on my choice, TDAmeritrade. Based on this article, and the fact they were giving bonus $$ for rolling other accounts into theirs, I went with them. But really I’ve been very dissatisfied. My wife has SEP with Fidelity and everything is just easier. Making contributions, selections, etc. With TD, their website is much harder to get used to than Vanguard’s, and I frequently get directed to my region’s “advisor” to answer my questions. She’s a nice person, but not very knowledgeable on the tax issues I have questions about, and seems mostly interested in getting me acquainted with fee-based funds and services. Overall their site/customer service is Very geared towards day-trading. Not really up my alley at all. So my two cents, for anybody shopping, is stay away from TD, go with Fidelity or one of the others. All the hassle is not worth the 300 bucks they gave me.
Thanks for posting that. It makes me feel a little better that I’m still hanging around at Vanguard. They’re a good option if you don’t mind the slightly higher investor share ERs and the inability to roll money into it.
I agree, TD website is extremely confusing to me, I have no idea how much I made, and the customer service is exactly as Steve said. Due to this I have basically kept 80% of my money in cash which is not good–I cant decide what funds to use..so for someone who wants to do minimal work I would go w/Vanguard. I may still switch to vanguard and move my money there–you can move your solo401k but cant do roll overs of other accounts
Remember you can easily buy Vanguard ETFs at TD Ameritrade. Certainly easier to do that than execute a rollover.
If read earlier in this feed (May 2016), you’ll run across my experience with TD. It was a mess. Terrible from a customer service perspective, outright misrepresentations, overcharges, etc etc. I moved everything (Roth 401k, i401k, nonqualifoed brokerage account) to Etrade and could not be happier!
I just recently switched practices and still work as W-2 employee. My last paycheck from my old group was given to me as a 1099 payment of about 25K. Would it be worth it to open a solo 401k just for that one payment and place 20% in as an employer contribution? I already max out my employee contribution at my other 401k of 18K. I am not anticipating any further 1099 income in the near future.
Only you can decide if it is worth it. It would be for me. It’s $5K into the account, so a deduction of $2K for about 8 pages of paperwork. I wouldn’t be surprised if you had something else to roll in there or contribute there some day. But if you want something really easy, open a SEP-IRA, put in your $5K, and convert it to a Roth IRA.
Hi,
I’m looking at my options on where to open Solo 401K and the only one remaining is ETrade. I have a 400,000 IRA rollover that I received from my previous employer and would like to consolidate it to a solo 401K so I can do the backdoor Roth IRA. I’m not just comfortable with ETrade having the majority of my money. My 400,000 currently invested at Vanguard. Unfortunately Vanguard does not accept rollover.
Thank you for your guidance!
I think you can open an etrade 401(k), do the rollover there, then open a Vanguard 401(k) and use that after this year. Or perhaps even move the entire 401(k) to Vanguard. You’d have to ask Vanguard about that last part though.
Thanks!
Not sure why you’re uncomfortable with Etrade having your money? I’ve been with them for years and couldn’t be happier.
There are other third party admins that allow you to do so but they are quite pricey (mysolo401k.com, for example.
The other option is to get a custom plan document (Ascensus offers one, for example) and open your own custodial account (or accounts if you want to open a Roth 401k) at any discount brokerage you want. The plan allows for direct transfers from any account you want. Of course, you would be responsible for record keeping (not a big deal). I believe Ascensus charges ~$125/year for their document. In addition, this option would allow for after tax contributions and in-service rollovers giving you the so-called “Mega Backdoor Roth” option.
Chris,
I think just because they are not as big as Vanguard. If they will get into trouble or hypothetically will close down, are you able to get your money?
Thanks!
Chris,
Been pursuing some of the options you mentioned for Solo 401k and have been referencing info at https://www.401kcheckbook.com/ . Any pointers you have about the subject? Considering getting my own document and using a discount brokerage account, as you suggest.
Thanks!
The caveat is that this info is almost 2 years old now so you might want to make sure it’s still up to date. . . . It’s a lot easier than I thought. I contacted Ascensus directly. They had a full-featured basic plan document and IRS approval letter at the ready. Their i401k document did not have the provision for after-tax contributions but their basic plan document did. The basic plan document allows for Pre-tax Traditional 401k, ROTH, and nondeductible after-tax contributions and in-service rollovers: perfect for my needs. They were quite helpful when I explored this idea and, apparently, I was not the first person they had helped. You, as the plan sponsor, act as the trustee and administrator. The record keeping part is pretty straight forward. Open two custodial accounts at the brokerage of your choice (I was going to use Etrade due to previous positive experiences and they offered to help with the process!). One account will be the designated Roth and the other Reg 401k. You can use ANY software you want to keep track of and characterize contributions (I was going to use Quicken). As for record keeping, nothing outside Quicken until rollovers are made, when you have to submit a 1096 and 1099r. Of course, a 5500 is needed when you hit $250k.
The 401kcheckbook.com plan seems to offer more investment options and, not surprisingly, more legal issues than the Ascensus pathway. I wasn’t interested in all that and did not investigate further with them. Ascensus wrote and provides the plan documents for Vanguard’s own 401k plans, they had a recent IRS approval letter for their plan document, seemed pretty conservative and reasonable pricing . . . all of which appealed to me.
Chris,
Thanks for all the helpful info. I’m in complete agreement with you, but I’m contemplating investing in some private placements that would be accessible using https://www.401kcheckbook.com/. The legal issues that could arise don’t relate to their plan document, which they say comes with an IRS approval letter. The potential compliance issues relate to investing outside of the public market and relate to so called “prohibited transactions.” I’m going to find out if they’re plan allows for the “mega backdoor Roth.”
Is there any bank/brokerage that checks all these boxes? #4 isn’t a deal breaker for me, but the other ones are with #5 probably being the most important.
1) Are there any account minimum balance requirements?
2) Are there any monthly or yearly fees?
3) Are there any account setup fees?
4) Are contributions/conversions/rollovers to a designated Roth account permitted?
5) Are incoming SEP/401k/IRA rollovers allowed into the Solo 401k?
6) How do I get funds into the account? Do I have to mail a check or can this be done electronically through an ACH transfer from one of my bank accounts?
Etrade:
1. no
2. no
3. no
4. yes
5. yes
6. ACH from multiple accounts or mail a check.
When referring to rollovers to designated Roth subaccount, what are the sources of those rollovers?
Non-deductible. It’s not a requirement, as I likely won’t be converting funds to Roth funds till after I retire. So probably doesn’t even apply to me actually.
Thanks Chris. I can still buy Vanguard funds/ETFs from e-trade, right? I’d like to be able to buy dividend paying stocks as well.
Yes, you can buy Vanguard or about any stock/ETF/mutual fund you want. I think the transaction fee is 4.99/trade for stocks/ETFS and $20 for mutual funds. They also have a bunch of NTF ETF’s and mutual funds.
When your aggregate account balance gets up there (1,000,000, I think), you get “Platinum” status.
I received a personal rep (he’s GREAT) and they throw some free trades at you. In addition, I got to use Vanguard mutual funds, ADMIRAL CLASS, in my accounts. They gave me 20 free fund trades per year and it’s $20/trade thereafter.
Ok, cool. Looks like trades are $6.95 and the $4.95 with 30 trades per quarter which I doubt I’ll ever do. I’m not a Dr, so I don’t see my balance reaching $1mm for a very long time, if ever. but it’s always good to aim high 😉
Yes. I think it’s basically a brokerage window.
https://us.etrade.com/what-we-offer/our-accounts/individual-401k
https://us.etrade.com/what-we-offer/investment-choices
Is buying a Vanguard fund/ETF from a brokerage the same or similar as buying it from a Vanguard account? I don’t know if I will ever buy ETFs/funds, but I’d like that option should I choose to do so.
The same except there are transaction fees at Etrde for Vanguard products whereas there are none at Vanguard. Since you will be transfering funds to Etrade, this may interset you:
https://us.etrade.com/what-we-offer/how-it-works/brokerage
Thanks again. So it looks like their regular fees are $6.95 for 29 trades during a quarter and then 30 and up is $4.95. I get $4.95 with Schwab in my regular taxable account, but when I was looking into this a few weeks ago things seemed very complicated.
Chris, I’m also interested in moving my funds to ETrade from Vanguard. Have you encountered any CONS in using their service. It seem like the best option because of the investment choices! Not to mention the bonus when you rollover your 401K. Thanks!
For me, the only CON has been their selection of NTF ETFS and mutual funds. Compared to Vanguard, TD, Fidelity and Schwab, the Etrade NTF menu is the least desirable. Of course, this became a nonissue when they gave me some free trades.
Thanks! I’m planning to just get VTSAX so it’s ok with me too 🙂
VAnguard
1) No
2) No
3) No
4) Contributions only
5) No
6) Easy ACH transfer
Thanks. Not able to do incoming rollovers is a deal breaker for me. I thought they were a brokerage, but you cannot buy stocks in a Vanguard account either. Didn’t know that. Vanguard is out. Always learning 🙂
I was able to roll over my old Solo 401k money into my new Solo 401k at Vanguard.
Can someone explain what a Designated Roth actually is? I’m not sure I even need that. IRS says it is an account inside of a 401k (or solo 401k). But talking to the Etrade guys they’re saying the Roth is a completely separate account from the Solo 401k. And what is the benefit, or what is a designated Roth normally user for compared to a regular Roth?
It’s like any 401(k). You can put your $18K employee contribution in pre-tax (traditional) or after-tax (Roth.) One you get a tax break for now, and one you get tax-free withdrawals. They’re both good, but the savvy investor will use one at certain times of life and the other at other times. It’s mostly about your tax bracket. If high now, defer the taxes. If low now, do the Roth.
I need the Solo now to lower my taxable income as much as possible, so contributing to a Roth now won’t help me in that regard. I’m 35 now, and we’re planning on retiring in 5-10 years depending on how much we can squirrel away while working. Is there even a point in the Roth now if we’re in the 15% bracket and trying to max out all the tax deductions as possible? I’d like to eventually start converting the Solo 401k funds tax free once our income is low enough to use deductions to offset the Roth conversions, but that will not be any time soon.
Well, it all depends on you and your financial life. If I had a chance to be in the 15% bracket again I’d be stuffing all I could into a Roth account. But if you never expect to be in anything higher than that, then sure, use the tax-deferred now.
She’s a public school teacher and I’m self-employed in retail. I would very much doubt it if we were ever above the 15% bracket in the future.
Hey everyone,
I’ve decided to go with Etrade. Setting up the account now.
Anyone have any thoughts on where to keep uninvested cash inside the account. Options below:
1. Etrade Financial Extended Insurance Sweep Deposit
2. Cash Balance Program
3. JP Morgan Government Market Fund Etrade Class
4. JP Morgan 100% US Treasury Securities Money Market Fund
Thanks for your help, as always!
I went with option 4 but, honestly, didn’t give it much thought. Given the interest rates are soooooooo low (0.1-0.2%) and I don’t keep much money in “cash”, it wasn’t a decision that had significant implications for me.
Thanks Chris, I plan to be around 95 – 99 percent invested so not a huge thing for me either, but curious if there were any advantages amongst the bunch.
if there is a significant difference, I don’t know what it is. I think they’re all insured. As I said, I’ve been using option 4 and it’s worked like a champ for me.
Is it true that you can only get investor shares at ETrade if you plan to buy Vanguard funds?
I’m also thinking of using ETrade.
Thanks!
“Platinum Status Clients” can buy the entire lineup of Admiral Class shares. Cost is $19.99/trade. You can, of course, buy Vanguard ETFs which have essentially the same expense ratio and pay a lower transaction fee. I don’t know what the exact criteria are for Platinum status.
No. You just buy the ETFs. You’re stuck in investor shares if you use the Vanguard Individual 401(k).
Schwab trades are now $4.95 as is Fidelity. Please update the post.
I’ll put it on the to-do list.
Do you have any idea how time consuming it would be to keep >1000 pages of the internet perfectly up to date? There is a reason there is a date on every post on this website. The decrease in commissions, while certainly welcome, doesn’t cause a substantive change in recommendations.
I talked to Etrade and Fidelity and here are their answers to my questions:
Questions for Solo 401k at Etrade
1) Are there any account minimum balance requirements? NO
2) Are there any monthly or yearly fees? NO
3) Are there any account setup fees? NO
4) Can I open the account now and wait till December or April of next year to contribute for 2017 and not be assessed any fees? No fees, this is fine.
5) Are contributions/conversions/rollovers to a designated Roth account permitted? YES
6) Are incoming SEP/401k/IRA rollovers allowed into the Solo 401k? YES
7) Any fees to rollover any of the above? NO
8) Are transfer fees covered on rollovers? Custodian transfer fees generally covered by E-trade
9) How do I get funds into the account? ACH from linked bank inside E-trade
10) Can I do contributions online? Yes for employed/employee and current/past tax year
11) Equity, ETF trade fee? $6.95
Questions for Solo 401k at Fidelity
1) Are there any account minimum balance requirements? NO
2) Can I open the account now and wait till December or April of next year to contribute for 2017 and not be assessed any fees? No fees, this is fine.
3) Are there any monthly or yearly fees? NO
4) Are there any account setup fees? NO
5) Can I make contributions to a designated Roth account? No, pre-tax only.
6) Are incoming SEP/401k/IRA rollovers allowed into the Solo 401k? YES
7) Any fees for incoming rollovers? NO
8) Are transfer fees covered/reimbursed on incoming rollovers? Depends. usually yes if >$25k transferred.
9) How do I get funds into the account? Check only
10) Can I do contributions online? Check only, can split single check for employee/employer though.
11) Is the 300 free trades offer valid for a Solo 401k too? NO
12) Equity, ETF trade fee? $4.95
The only thing keeping me from going with Etrade is that their trades cost more, and Fidelity does 300 free trades for 24 months. That could save me $1,500 if I use every free trade every month. That’s huge. Even if I don’t do my Solo 401k through Fidelity I may transfer my TradeKing account to them since I don’t get any free trades there and Mint no longer works now that Ally bought out TK recently.
The free trades do not count in a Solo 401k account, so they’re out.
Thank you for sharing the results of your research. Super helpful.
I hope for your portfolio’s sake that you don’t use all 300 free trades! That much jumping around is likely to be counterproductive.
So I keep seeing “Roth-option” mentioned for E-trade. What exactly does that mean? Is that a sub-account inside of the s401k or is it a separate account? Etrade does offer a Solo Roth 401k that’s listed alongside their SEP, s401k, etc plans. Is this it? Are you transferring pre-tax funds from the s401k into some type of Roth account?
I want to setup a s401k for me since I can contribute so much more each year to lower my tax burden, but I plan on retiring before I turn 59 so I’ll need access to this cash early. Once we’re retired we should be able to begin converting funds into Roth accounts tax free due to deductions/exemptions/qualified dividends, but I have no idea how this works in practice.
if you choose the Roth option (which I did), you get 2 separate accounts: 401k and Roth 401k. They are simple custodial/brokerage accounts.
Ok, so if I open up a Solo 401k I’d also open up a Solo Roth 401k? Or just a regular Roth account? I’m looking at Etrade since they’re so flexible.
Also I wouldn’t even be contributing to the Roth till after I retire, and that won’t be for another 5-10 years anyways.
Is it possible to transfer some of the pre-tax funds from the Solo 401k into the Roth account to do tax-free conversions?
Just spoke with Etrade. According to them you can do in-plan roth rollovers from the Solo 401k into the Solo Roth 401k. So yes, you can convert pre-tax dollars from the s401k into the Roth account any time. It will be treated as income, but as long as I have enough deductions/exemptions to offset that it will be tax free 🙂
Hi everyone. I’m new to the website and in need of a little advice on this subject. Thanks in advance for your assistance.
I’m an independent contractor with a LLC functioning as an s-corp just over one year out of residency and expecting to make about 400k this year between my primary job and some moonlighting on the side. After residency I filled up an emergency fund and then began pouring all my extra funds into my student loans; they should be gone in about 20 months. I recently read the WCI book and started poking around on the website. I read the post “SEP-IRA VS Solo 401K”, and had decided to go with a SEP-IRA at Vanguard. After having spent more time reading posts and comments since then, it’s looking like I probably should have gone with a solo 401(k) instead. I’d like to use a 401(k) that gives me access to Vanguard’s index funds (total stock, total international stock, and total US bond) as the foundation for my retirement, but from what I’ve read there are some significant disadvantages to going with vanguard directly (i.e. no access to admiral shares, inability to roll a Vanguard IRA into a Vanguard solo 401(k)).
1) Did I shoot myself in the foot by already opening the SEP-IRA? Will I need to just stick with it this year and roll it over into another company’s solo 401(k) next? Is there any way to somehow cancel this fund and start over with a 401(k)? I’d like to be able to do the back-door ROTH conversions for 2017 if possible. If not, it’s not a huge deal, but every dollar counts.
2) Am I wrong in assuming that Etrade is the way to go when I finally am able to set up my solo 401(k)? It seems like either them or Fidelity from the most recent comments.
2) If I understand correctly, the following seems to be the overall setup that is being recommended for an independent contractor as far as investing goes:
– Solo 401(k)
– Personal & Spousal back door Roth IRAs
– HSA
– 529s for the kids
– taxable investing accounts
1. Yes. Yes. No. But it’s fixable, so no big deal. Just open a Fidelity or eTrade one next year, roll your Vanguard SEP-IRA in there and you’ll be fine. You can still do the 2017 contribution, just don’t convert it until 2018.
2. No. I think I’d probably do eTrade if I had it all to do again. But it’s nice having it all at Vanguard when I log in. Wish I could get Admiral ERs in the Vanguard individual 401(k). The rollover feature doesn’t matter to me since I have nothing to roll over.
2 Again. Sounds about right. You can do a personal defined benefit/cash balance plan too if you want.
Thanks for the quick reply! I hadn’t realized that you’d replied already; was waiting for an email notification and it didn’t come through for some reason though I had subscribed to updates to the post.
Do you think it would be worth building a custom Vanguard solo 401k as outlined in the post below? I’m planning on working for the next 25 years plus, and I’d like to have access to admiral shares if possible. I have someone who helps me with my taxes, and I assume they’d either do the 5500 form for me at what I’m paying them now. If not, I’m sure I could figure it out myself to avoid the ongoing yearly $250 charges.
https://www.whitecoatinvestor.com/improving-the-vanguard-individual-401k-with-a-customized-plan/
As an independent contractor without employees? No. I’d just an off the shelf Vanguard/Fidelity/Etrade/TD Ameritrade individual 401(k). I’d like access to admiral shares too, but they don’t offer that at Vanguard individual 401(k)s. But it’ll cost you more money and hassle to do a custom plan. A better solution is probably just to open an account at eTrade and buy the Vanguard ETFs- same low ER as the admiral shares but it’ll cost you a few bucks in trading commissions. If you’re careful, you can almost surely limit that to less than $50 a year.
The 5500-EZ is awfully simple.
1) Do you have a 401k at your primary W-2 employer and have/will defer the employee deferral limit (2017 = $18K)? If so, there is no downside to the SEP IRA. You can make the same employer contribution (25% of W-2 box 1) up to $54K that you could have made to a one-participant 401k. You get to use Admiral shares in a SEP IRA.
Sure there is. You can’t have a SEP-IRA and do a backdoor Roth.
I don’t have any W-2 income at all actually. Both my primary job and my moonlighting are as an independent contractor.
And that’s correct I have no employees. I’ll probably go with ETrade first thing next year then and just roll my SEP-IRA over there.
Thank you guys for all the info. I’ve got a lot to learn.
I am opening my spouses solo401k to move their IRA there for the Backdoor Roth IRA. We will probably do periodic investments to index funds and a Bogleheads “lazy” portfolio. We don’t need loans. We DO need IRA rollover option which eliminates Vanguard. Not sure we would use the Roth option as we need the tax break. A few questions:
1) Your solo 401k is at Vanguard. Where do you wish it was and why?
2) What are the advantages of using ETF’s over index funds?
3) Where you would advise us to open the solo 401k?
1) I’m fine with Vanguard, but don’t need the rollover feature. My only real beef with it is you have to use more expensive investor shares instead of admiral shares. If I had it to do over again I might just go to eTrade and buy Vanguard ETFs.
2) They are minimal in most scenarios, can be negative in some scenarios, and sometimes they are a little better. I prefer funds but will use ETFs if they are cheaper to me in that particular account (like my 401(k)).
3) I don’t give formal advice, just information. If you need professional advice, you can try one of these guys: https://www.whitecoatinvestor.com/financial-advisors/
But as I said above, if I needed a rollover option I’d probably be at eTrade buying Vanguard ETFs.
I have e-trade and you can buy admiral shares of VTSAX. You can’t buy online but your Etrade representative can buy it for you.
I have a question on 401 K contribution.
If you expecting to have an income of 60,000 dollars for the year, can you contribute the salary deferral and employer contribution at the start of the year?
Thanks!
No, it is not like IRA contributions that can be maxed on the first business day of the year.
For the self-employed:
Employee deferrals can only come from compensation not already received. No net self-employment income (net business profit – 1/2 SE tax), no compensation. The same is generally true for employer contributions, except there is a special rule. You can make employer contributions based on a pro-rated reasonable projection of the full year’ compensation. Also, the employee deferrals and employer contributions combined can not exceed the actual or projected compensation to date.
For S-Corp shareholder-employees:
Employee deferrals must be deducted from payroll for compensation not already received. This is true even if the corporation has not received enough business income for the year. However, this must come from the corporations accounts. This can be basis from investment or loans or undistributed prior year ordinary business income.
Likewise, employer contributions can be made timely with employee deferrals even if if there is not current business revenue as above.
So the bottom line for sole proprietors, is that while you can front load employee deferrals as soon as net-self-income is received, employer contributions must be based on either actual net self-employment income received or a pro-rated reasonable projection of the year’s net self-employment income.
CAUTION: You need to be very careful about not getting ahead of yourself and making excess employer contributions during the tax year.
While excess employee deferrals and their earnings are relatively straightforward to have returned with the consequence just being that the earnings are taxed.
Excess employer contributions to a 401k can not normally be returned. They must remain in the account, are not deductible, must be reported on Form 5330 subject to a 10% excise tax/year on non-deductible contributions until they are reconciled by unused employer contribution space on additional Form 5330(s).
Thanks for the tips. I think I’d better watch that! Might be maxing those things out a little early in the year.
P.S. My recommended best practice for the self-employed is to never make one-participant 401k employer contributions based on more than 75% – 80% of net self-employment income during the tax year.
Then make the final employer contribution after you have completed your tax return the following yearm when you know the exact amount. Also, even if there is a mistake in the tax return, any excess contribution can easily be reclassified as a contribution for that following year.
Anyways what is the rush, you have until your tax filing deadline, including extensions (if you filed an extension) to make both employee deferrals and employer contributions
Correct me if I’m wrong . . . not a “rush”, per se, but the math is compelling. The reason to contribute the $18K as soon as it is earned (assuming you can afford it) as opposed to your tax filing deadline is that it will begin to accrue earnings right away. The same could be said about IRA and ROTH account options. If you play with the numbers, investing 5 months earlier (Jan 15 vs April 15 following year), would yield higher portfolio returns. Extending this practice over a career would not be insignificant. Schwab has a nice little graphic illustrating the effect over rolling 20 year periods with IRA contribs. Don’t if we’re allowed to post links here but here it is: https://intelligent.schwab.com/public/file?cmsid=SIP-CONTENT-RESOURCE-IMAGES-3&filename=1603_SIP_TimingIRA_Figure2_FINAL.jpg
The rush is the sooner you get the dollars in, the sooner they can grow in a tax-protected way. There is definitely a benefit to putting it in on January 2 rather than April 10 of the next year.
I have a sole proprietorship that I earn income on the side apart from my primary employment. My employment income is over the Roth limitation. Does this prevent me from opening a Roth solo/individual 401k even if my sole proprietorship income is low?
No, but just remember that you only get one $18K employee contribution no matter how many 401(k)s you have and only the employee contribution can be Roth. Employer contributions, of which you can make $54K per 401(k), are always tax-deferred.
Also, if you were not already aware, a sole proprietor can make an employee deferral (subject to the combined $18K limit ) of up to 100% of their net self-employment income = net business profit – 1/2 SE tax. The employer contribution is limited to 20% of net self-employment income.
Unless you used that employee contribution in another 401(k) at your main gig.
P.S. My recommended best practice for the self-employed is to never make one-participant 401k employer contributions based on more than 75% – 80% of net self-employment income during the tax year.
Then make the final employer contribution after you have completed your tax return the following year when you know the exact amount. Also, even if there is a mistake in the tax return, any excess contribution can easily be reclassified as a contribution for that following year.
Anyways what is the rush, you have until your tax filing deadline, including extensions (if you filed an extension) to make both employee deferrals and employer contributions
Hi WCI,
Great work! Your posts have been so informative, practical, and simple to understand. I cancelled Whole Life Insurance policy at the last minute after reading your blog. Also, increased Term life, umbrella insurance coverage and about to cancel my current solo 401k because of high fees. Here are questions
1: I have selected Traditional Pension option with my state university. Do those contributions count towards $18k “employee” limit of 401k. My CPA didn’t say anything. I am still contributing $18k to employee portion of solo401k
2. I have about 180k 1099 income. To max employer portion I need show all income as salary. So then you end up paying payroll and SS tax. Plus employer portion of payroll taxes. I am showing about $60-$70k salary and so 15k employer match. Do you think I should increase salary to max out employer contribution?
3. If I am not maxing out employer match in solo401k, should I try to increase that or try Backdoor Roth IRA first?
Thank you again for this post and discussions.
AD
1) Ask HR, but probably not. Remember you only get one employee $18K contribution no matter how many 401(k)s you have. The rest has to be employer contributions. I couldn’t tell if you also had a 401(k) at the state U.
2) Tough question, but probably for a couple of reasons. First, you’ve probably already maxed out your Social Security tax, so it’s really only Medicaid. Second, $60K/$180K seems like audit-bait. My general rule is make no less than 50% salary.
3) No right answer. I’d try to do both. But I guess if you’re not saving enough, then you could do the Backdoor Roth IRA and NOT increase the salary and save a few taxes there.
2) Based on Pran’s description of paying a salary, they have an S-Corp. All corporations must deduct from their W-2 employees, the full FICA including the Social Security (SS) component up to the SS maximum wage base (2017 = $127,200).
An S-Corp is a very bad idea when you have primary W-2 SS wages >= the SS maximum wage base. Because while the employee share (6.24%) is refundable on your personal 1040, the employer share (6.24%) is never recoverable.
The net result is that an S-Corp will pay 9.1% FICA on the shareholder-employee’s W-2 wages, where a sole proprietor will only pay 2.9% SE tax on 92.35% of net profit.
Even in this case with what I agree is an “unreasonably low” salary, Pran’s S-Corp will be paying more in FICA than he would have paid in SE tax with a sole proprietorship. This will only get worse if the salary is raised to a more “reasonable” salary or even higher to increase the employer contribution.
Sorry to say the best solution in this case is to dissolve the S-Corp. You will pay less in employment taxes and automatically be able to make the maximum employer contribution.
We really need to scream from the roof tops that the vast majority of white coats should not create an S-Corp for moonlighting 1099 income. Only in a distinct minority of cases where this additional income is very large and/or come from other than professional services.
That’s really an excellent point I hadn’t really considered before.
This is really interesting, if, for no other reason in that it explicitly contradicts advice I received from my CPA! When I started my Solo Db with Schwab, he had me incorporate (S Corp) for 2 reasons: first, lower chance of audit; second, due to the fact that all my pension contribs as a sole proprietor would be subject to FICA (deducted on 1050) whereas those made by corp are not subject to ANY employment taxes. I’m going how him Spiritrider’s note and see what he says. Thanks!!!
You’re weighing one thing against another here. In my situation, where my practice is a K-1 partnership, it’s fine to incorporate WCI. It’s only where you’re an employee in both jobs.
Thank you. I get it now. There are SS limits on the wages received by the employee, whereas there are also SS limits on the wages paid by EACH employer. So, as long as only 1 job is W2, there will be no duplication of employer portion (one gets back the extra employee portion back as a tax refund).
I don’t have 401k through University but I do have 403b and something else. I will let you know. So 403b contributions are also counted towards “employee” 18k limit?
And one thing I haven’t seen you discussing much is comparison between Vanguard or Fidelity Target Date retirement funds ( which are very appealing to someone like me who is busy with day to day stuff, relatively new to finance, and likely to respond to emotional turmoil during bear market) and simple customized portfolio based on boglrheads’ recommendation? If you could discuss the different in terms costs and performance?
Thanks again for your prompt replies. This is truly satisfying experience.
Pran
Yes. There are also some unique rules regarding solo 401(k)s when you have a 403(b). You’ve read this post, right?
https://www.whitecoatinvestor.com/multiple-401k-rules/
Thanks for that link. I really didn’t understand the implications of 403b but I will stop further 403b contributions. I will only contribute to ’employee’ solo401k to get to $18k. And, will increase salary A bit to increase 25% of employer portion.
Also just checked. University offers 457 plan as well. From your article it looks like I can make $18k Roth or pre-tax contribution in it. It would be separate and in addition to $18k “employe” retirement portion of 401k/403b. Correct? If so, this should be a good Roth saving option?
I was checking the funds available in 457 plan. They have Vanguard target retirement funds like:
Vanguard Target Retirement 2045 Trust
Investment strategy
The underlying funds are: Vanguard Total Bond Market II Index Fund, Vanguard Total Stock Market Index Fund, Vanguard Total International Bond Index Fund, and Vanguard Total International Stock Index Fund.
Expense ratio as of 06/30/15
Is only0.05%. It looks pretty low.
again, what do think about these target retirement funds? And how do you compare them with customized personal portfolio?
Thanks for your help.
Pran
Total Intl Stock Idx Fund
†Fund holdings are subject to change.
Vanguard Target Retirement 2045 Trust Select
Balanced fund (stocks and bonds)
Risk level
Low High
Investment objective
Vanguard Target Retirement 2045 Trust Select seeks to provide capital appreciation and current income consistent with its current asset allocation.
Investment strategy
The trust invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire and leave the workforce in or within a few years of 2045 (the target year). The trust’s asset allocation will become more conservative over time. Within seven years after 2045, the trust’s asset allocation should resemble that of the Target Retirement Income Trust Select
Expense ratio as of 06/30/15
0.05%
Target Retirement 2045 Composite Ix
Allocation of underlying funds†
Total Stock Market Index
Total Intl Stock Idx Fund
Total US bond fund
Total international bond fund
Yes, the 457 limit is separate. Yes, you could do Roth there, but I don’t know if you should. That decision is more complicated. The usual right thing to do during peak earnings years is tax-deferred, not Roth.
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Target retirement funds are fine, but they don’t mix well with other funds. They’re more of a stand alone thing. A typical doc with multiple retirement accounts should look at all accounts as one big portfolio. More info here:
https://www.whitecoatinvestor.com/7-reasons-i-dont-use-target-retirement-funds/
But there’s something to be said for doing it the easy way:
https://www.whitecoatinvestor.com/in-defense-of-the-easy-way/
There is no need to arbitrarily stop 403b contributions. Just be aware of the limitations.
There is a single combined Employee Deferral (ED) limit (2017 = $18K) between the 403b and your one-participant 401k. There is a separate $18K limit for the 457b.
Also, any 403b contributions (ED + Employer Contribution (EC)) is included in the annual addition limit (2017 = $54K) with your one-participant 401k ED and EC.
Put another way: 403b ED + 401K ED <= $18K, $54K - $18K = $36K, 403b EC + 401k EC <= $36K.