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!
ETrade Customer Service Issues
I’m not sure how so many WCIs are pleased with their ETrade accounts. I opened a solo 401k with them last year for the plan features, fund options, etc, which all seem great, but their customer service is absolutely horrible! 2+ hours on hold to speak to a customer service agent to fix a contribution tax year error. Nightmare. Every time I’ve needed to speak to them about my account (only about 3 times since you can do many things yourself) its 2+ hours on hold, no chat service, no outgoing secure messaging for new issues, it’s a disaster. Hard to imagine other brokerages would be this bad? Is there some magic back office number you all know about that I don’t??
Just my $.02. The plan and the account are great, the customer service is unbelievably bad and from what I’ve seen, has not improved after the MS buyout.
You can go to a smaller shop that does self-directed solo 401(k)s. It’ll cost you more but I bet the service is better. But I’ve heard similar complaints about Vanguard etc.
This is across the board then. I think this time of the year everyone is calling their brokerage company Dec/Jan to fix something for the year, open a new solo 401k before the year end adding or categorize contributions etc. I was on hold for at least 2-3 hours when I was calling fidelity last month for questions about my solo 401K, but 3-4 months earlier, I barely wait 3-5 minutes, I guess is that time of the year
I opened the Etrade account for the same reasons in 2018. Onboarding was easy, rolling over old employer plans was rapid and the Plan properties all worked. But Etrade has some very serious systems problems. Getting money out is a big one. Moving on from Etrade has been like leaving the Hotel California.
I elected to create a “checkbook” 401(k) with all of the same plan features and bring the custodianship and record keeping in-house. This is a bit of a pain, but at least I know it’s accurate. There are companies that will do this for you. But the trick is getting Etrade to do direct transfers to the new accounts. That has been a nightmare. If I were to do it over, I’d hire one of the companies and let them get the funds out.
I am now the record keeper, produce my own 1099Rs for in-plan conversions and distributions and do the 5500. The main caveat is you really need careful and detailed record keeping. I have spreadsheets and databases and use gnucash for ledger accounting. And…you have to keep the funds segregated from your personal accounts. No comingling. I keep separate sub-accounts for 401k and 401k Roth, both brokerages and cash accounts for assets within the plan and personal (non-plan) assets. But under the plan you can open up accounts at any brokerage owned by the plan. I have accounts at several fund companies and a brokerage owned by the Plan as well as a separate cash savings account owned by the plan to hold liquidated cash in anticipation of the next quarter living/play expenses.
Thank you so much for all your work and information! I was wondering if there are any updates. I am a bit confused about the vocabulary.
This is my current situation:
I am entirely 1099(sole proprietor) and currently have in Vanguard:
1) SEP IRA
2) traditional IRA
3)Roth IRA.
I am not eligible to contribute into Roth anymore due to income limit so I contributed to traditional IRA the last 2years.
I want to set up a solo401k so I can do the backdoor Roth and the possibility of contributing more in future if my income increases significantly. I understand I need to roll over my SEP IRA into the solo401k, then do the backdoor roth from traditional into Roth to avoid prorata.
My Questions:
1) When the solo401k plan states that it does not allow “Roth option” – does this mean you cannot do a backdoor roth, or you cannot contribute directly into roth (if your salary qualifies)? I guess I am unclear about what “Roth option” is referring to.
2) For my situation, I believe I will need a solo401k plan that will allow rollovers, and roth option(depending on what it actually means)? Am I missing anything else? Is there a plan that you know of that you think will best suit my situation?
3) Do I need to move my roth/traditional/sepIRA from vanguard if I choose a solo401k outside vanguard in order to do the backdoor roth?
4) If my solo401k is with another company other than vanguard, can I just do the backdoor roth conversion after I move my sepIRA (vanguard) into this new solo401k(non vanguard)?
Thank you so much
Hi Carm. I understand your confusion and that is a good question.
When the solo401k says they do not allow the Roth option, they are not referring to the back door roth. They are referring to putting post tax money into your 401k as opposed to the regular pre tax. I believe they also refer to this as a mega back door roth. It has nothing to do with your regular Roth account which you already have and will continue to use for your back door roths.
Therefore yes, you can open the vg solo401k which accepts rollovers, and rollover your sep and trad 401k into it. The solo401k you open does not need to have the Roth option.
Then close the sep, but leave your trad and Roth 401ks open, and you will maintain a zero balance in the traditional except for when its time to do your bd Roth. You don’t need to touch the money in the Roth. You must always have a zero balance in the trad on 12/31.
If you like vanguard, there is no reason you’d have to open an account at another brokerage. Hope this helps.
No, that’s not what this article refers to. It’s important to keep it all separate in your mind.
There are Roth IRA contributions.
There are indirect Roth IRA contributions (i.e. through the Backdoor Roth IRA process where you contribute to a traditional IRA and then convert it to a Roth IRA).
There are Roth 401(k) contributions (what this article refers to)
There are Mega Backdoor Roth IRA contributions (what you’re referring to but this article is not when it uses the phrase “Roth option”, where you contribute after-tax (not Roth) money into a 401(k) and then convert it to a Roth 401(k) or roll it over to a Roth IRA)
Your advice of what this investor should do, however, is correct, aside from the fact that you said “trad and Roth 401ks open” when you meant “trad and Roth IRAs open”
Hope that helps.
1. Roth contributions to your 401(k). There is no salary limit on Roth 401(k) contributions.
2. Lots of plans out there allow both Rollovers and Roth contributions. Sounds to me like the cookie cutter (and free) Vanguard plan will work for your needs. It used to not allow SEP IRA rollovers into the plan, but it does now.
3. No.
4. Yes. Company doesn’t matter.
TD Ameritrade, now acquired by Schwab, have recently accounced that their solo Roth 401k option is being withdrawn effective from Dec 1, 2022.
Thanks for the update.
Interesting change. What are they doing with the existing Roth sub accounts? Will they continue to maintain them?
I moved all my accounts from ETRADE to Schwab, but not to their stock solo 401k plan. I created my own “checkbook solo 401k” plan.
The reason I did this is Schwab didn’t have a Roth 401k sub built into their plan. Instead I went to Ascensus who offers an IRS prototype solo Plan with highly tailorable options and created a “checkbook” solo 401k with my Trust as the record keeper/custodian and had Schwab open two accounts under what they call “Corporate Retirement Accounts” as follows:
pre-tax 401k CRA (self – sub account)
Roth 401k CRA (self – roth sub account)
and spousal accounts if spouse materially participates.
Ascensus charges $200 or so a year for maintaining the Plan Documents, including the required regulatory updates. They will work with you to set up exactly what you need. From there on its on autopilot. For mine, I set up the Plan Documents and a slightly modified adoption agreement which allowed the Roth sub as well as 401k plan loans.
The business structure is a pass through LLC sole partner which passes income directly to Schedule C but with a business entity with its own EIN and a Trustee entity as Recordkeeper/Custodian.
Putting money is in straightforward, with standing letters of authorization from/to the LLC checking account.
The downside of this approach is that you are completely responsible for ALL record keeping. Every bit of it.
This means:
participant contributions (self and spouse if applicable) to 401k side; Roth 401k side.
Insuring participant contributions do not exceed limits plus if applicable catchup contribution. Do not exceed the income limits which is basically your FICA taxable income for self/spouse.
Employer contributions up to the limit for the FICA taxable income received.
Filling out the 5500EZ if required (most of us will at some time, hopefully)
For Distributions:
You will be responsible for issuing yourself a 1099R for any distributions you make and filing a copy of this with the IRS.
You will be responsible for issuing yourself a 1099R for any in-plan pre-tax to Roth conversion you make.
For example, I converted $X from my pre-tax 401k account within the plan to the Roth 401k sub account.
My 1099R for the year will read From the Retirement Trust Company (record keeper) and its EIN to me, in block 1 amount $X, in block 2 taxable amount $X or I could check “taxable amount not determined.” and in Box 7, G since I can take distributions. I will have to pay tax on this money in the TY I do the conversion.
If I do multiple transfers in a year (likely this year given the state of the markets), I will generate a single 1099R with all of the distributions along with a schedule of dates transferred to allow 1040ES payments to be consistent with the quarter distributions were actually paid.
For loans, I create a formal participant promissory note on paper, sign it and have it notarized. I make sure I am compliant with the IRS benchmarks. These notes and the plan documents provide missed payments can be considered distributions if not remedied in the following quarter.
The final step of the retirement plan will be to roll over the Roth 401k sub account into my Roth IRA before I reach RMD age which right now keeps getting further away as they keep raising the age. This will exempt that money from the RMD whereas the Roth 401k is not exempt from RMD calculations.
My hospital doesn’t offer a 401k, so I contribute to their 401a to utilize the mega backdoor Roth IRA. Do the 401a contributions count toward my solo 401k contribution limit? Thanks!
Man, good question. I think 401a contributions generally are considered employer contributions, so I think you’re still okay to make a full $20,500 employee contribution to your solo 401(k). At any rate, my sense is that the IRS doesn’t look at that very closely anyway.
Can I make the maximum contribution for Solo 401 all through the employer side of my S-corp?
I pay myself a reasonable w2 salary of 250k (Based on my specialty) and take the remainder of profits as distributions .
%25 of 250k = 62,500. Am I required to make the 20,500 (in 2022) through employee contributions and then $40,500 through employer contributions to max out the solo 401k or can I just have my “employer” (me) contribute the entire $61,000 max?
I am a W2 employee but my employer doesn’t offer 401k/403b. Can I open solo 401k and how much can I contribute per year?
No.
$0.
Sorry your employer hates you. Lobby them to start a retirement plan.
Hi. My spouse has a W2 employment and a side hustle that generates a 1099 misc income. I opened a solo 401k for her and myself . I started a llc and filed for s corp for the 1099 income. The solo 401k is with Vanguard. There was no mention of a requirement to do a w2 in order to contribute to the solo 401k but my accountant says that I needed one as it is a employee deferral program and to do a employee deferral I needed to generate a W2. Since it is already February I would not be able to do a W2 and will have to do corrections. Is this true? I called Vanguard and they say they cannot advise us on taxes but since we a self employed there is no need for w2. We did not make any retirement contributions through the W2 for employee deferral although they did give a 3% into the employer end ($500). Do I need to correct my contributions to solo 401k
That would be very weird to be an S corp and not pay yourself a salary. I think I’m with your accountant. It’s not so much about the 401(k) as it is about paying a reasonable salary for the work done. That’s a huge audit red flag not to, but S Corps rarely get audited so maybe you get away with it this year. Your employer contribution as an S corp is 25% of your salary. Since you didn’t pay a salary, there’s nothing to contribute. Your accountant is right. The Vanguard rep is wrong.
Thank you so much for answering. I guess I did not do enough reading before I dove into forming a LLC and making a solo 401k. I know my accountant filed the papers to be a S-corp but the IRS has not processed this at this point. I am confused as to what I am supposed to do at this point. I made contributions to the solo 401 k. The net income for the LLC was $92k that was reported on 1099. My spouse and I figured our “salaries” would be $46k each. We made estimated tax payments each quarter to the IRS but did not make paperwork for a W2 (honestly we didn’t even think of this). For us a W2 was when you work for someone else not for self. We thought when the taxes were done the accountant would take care of this and tell if we could put anything away on the employer side. We assumed that given the $46k each we should each be able to put away the allowed $20500 for her and $27000 (catch up) for me. There was nothing from the actual W2 employer. The issue now is what to do. I made the contributions but have not filed the taxes and this is the first year for the LLC. In all the readings including the ones from Vanguard there was only even talk of contribution and never the fact that you have to pay yourself a salary and do a W2. My previous account formed the LLC and sent the paperwork so we would be taxed as S corp. He never told us about having to pay a salary. It is the new accountant that mentioned anything about a W2.
So if you’re a sole proprietor/partnership for 2022 and an S Corp for 2023, then no big deal. You can pay a salary this year, make 401(k) contributions as a sole proprietor for last year and all is well with the world.
If you form an S corp you no longer work for yourself (that’s a sole proprietorship.) You now work for a brand new entity, the S Corp.
I have to agree with WCI. I am aware of one sub S what was audited precisely for this reason. It was a very small manufacturing outfit. The IRS examiner dinged them for not paying a salary and not paying FICA on the W2 earnings. They settled for a modest wage and paid FICA on that wage. It eventually benefited them in that it gave them sufficient earnings to be eligible for Social Security. They eventually decided to form an LLC /Schedule C, and payed more FICA, but allowed them more flexibility.
WCI (and Walt), thank you so much for your answers and patience. I have learned a lot from this site. I first learned about back door from reading elsewhere but really understood it from this site and how to use Turbotax to do my taxes correctly. I did that for 25 years as we were only W2 employees of a hospital and didn’t venture into other work. Recently we moved to Florida (no state taxes) but hit a snag with the new job and ended in this mess of W2 plus 1099. It is so good to have a site where you can get answers to questions from novices like myself. Thank you again. I hope to keep learning and growing.
Our pleasure.
Is it true that Vanguard Solo 401K still does not allow investing into ETFs?
If so, is there a minimum investment amount in their solo 401K? What if you want to make periodic contributions that are less than the normal $3,000 minimum for VTSAX?
Thanks!
I think that’s still true.
Just the minimums on the funds. But if you can’t meet those, it’s probably not worth the hassle of the Solo 401(k). But that $3K minimum is just for the initial investment.
Hello,
I am just starting my journey of financial literacy so I feel a little dumb asking but…
I work for a telemed company on the side (not may day job) picking up hours when I can for their virtual urgent care. This would be considered an independent contractor, correct? I ask because I would like to open a solo 401K, but before I do that, I would need to obtain an EIN, right? 🙂
Dunno. Are you an employee or an independent contractor? Do you get paystubs or just checks? Read your contract. Ask your boss if you still can’t figure it out. This is a detail you definitely need to know.
If you’re an IC, you can get an EIN and then open a solo 401(k).
do you receive a 1099 or a W2?
I have 3 jobs.
Main job is a W2 with 401k with profit sharing.
2nd job is a W2 with separate employer with 403b with employer match
3rd job is 1099 with separate employer. I will be creating a solo 401k.
I want to max after tax contribution with a mega back door roth ira in the solo 401k. Do I just subtract $66,000 (less than 50 yrs old for 2023) from my total 401b employee contribution + employer match to get my total amount? I couldn’t find the exact issue with 403b affecting solo 401ks.
Does mysolo401k.com do all of the paperwork in regards to this process?
Typo: I want to max after tax contribution with a mega back door roth ira in the solo 401k. Do I just subtract $66,000 (less than 50 yrs old for 2023) from my total 403b employee contribution + employer match to get my total amount? I couldn’t find the exact issue with 403b affecting solo 401ks.
Does mysolo401k.com do all of the paperwork in regards to this process?
If I understand what you’re asking the answer is yes, if you put $22.5K into the 403b and the employer puts in $7.5K ($30K total), then you’ll only be able to do a $36K after-tax contribution to the solo 401(k) for the MBDR. Stupid rule I know.
Yes! Thank you! That was my question.
How easy is it to use mysolo401k? I’m somewhat competent with finances. The website itself seems very helpful with tons of useful information.
I thought it was very easy and very fairly priced.
As I understand it, you have two limits:
66k is per job, regardless of whether it’s the “employer” contribution or the “employee” contribution.
22,500 is your individual limit, across all jobs.
So I think it depends.
In my W2 job, my profit sharing (66k) is structured as 66k “employer” and 0k “employee”, leaving me with all of my individual limit unused.
So in my 1099 solo work, then, I can contribute all 22.5k of my individual and then up to 43.5k as a “employer” — if I made that much in my solo gig. I don’t, so it works out that I at least get to contribute the 22.5k.
If your first two jobs are defined in a way that uses up all your individual limit, the solo may not help you.
The 403b and the solo 401(k) share the same $66K limit. Sorry, weird rule I know. All three accounts share the same $22.5K limit for employee tax-deferred or Roth contributions.
My solo401k.com can certainly help you in this situation but just watch that weird 403b rule and make sure you totally understand what I wrote in this post:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Bryan is correct. The $66k limit is per employer, not per person. The employee limit is shared between all plans the employee can contribute to, but the employer limit is not. So if the 403b and 401k are at different employers, they do not share the $66 limit.
IRS reference:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits#:~:text=Total%20annual%20contributions%20(annual%20additions)%20to%20all%20of%20your%20accounts%20in%20plans%20maintained%20by%20one%20employer%20(and%20any%20related%20employer)%20are%20limited :
Note this sentence: “Total annual contributions (annual additions) to all of your accounts in plans **maintained by one employer**(and any related employer) are limited.”
That IS the case for all 401(k)s. However, a 403(b) is a special case as discussed here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Rule #7 – 403(b)s Are Not 401(k)s
Many physicians have access to a 403(b) by working for a hospital or public entity. There is a unique rule for 403(b)s, however, which will prevent many doctors who use a 403(b) at their main job from maxing out an individual 401(k) on the side, at least if they own 50% or more of the company for which they have an individual 401(k) (and they probably do). It doesn’t make much sense, but neither do many tax and retirement plan rules out there. Basically, your 403(b) at work, unlike a 401(k), is considered to be controlled by you. So you are stuck with the same 415c limit of $66K (see Chapter 3 at the link). So if you put $22.5K into your 403(b) at work, you are only allowed to put $66K-$22.5K=$43.5K into an individual 401(k).
Your reference applies only to 401(k)s and this particular question involves a 403(b). Sorry it’s so complicated but I’m quite sure that I am right on this one. See the link above for more details.
I stand corrected. Thank you. I learned something today.
Would love to see an updated post about the best providers.
Have you read this post?
https://www.whitecoatinvestor.com/solo-individual-401k/
I’m also starting my financial journey, and way behind on retirement savings. I did manage to max out my day job’s 401k and HSA, and have a small LLC started this year.
For the LLC, my income is expected to be 600$ from book royalties and the LLC formation was $900 Should I start a solo 401k to put the 20% income in as an employer contribution, or am I prohibited because of the $300 net loss? I know it’s small but hoping not to stay that way.
You don’t have any profit from this business so you can’t contribute anything to a solo 401(k) for it. Hopefully that income grows. No point in starting a 401(k) yet unless you have a need for an IRA rollover or something to allow for BD Roth IRA contributions.