Where To Open Your Solo 401K

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I’m a huge fan of Solo 401Ks for self-employed physicians.  You can max it out ($52K in 2014) on less income than a SEP-IRA, you can get a Roth option in it, and you can still have Backdoor Roth IRAs on the side.  If you’re an S Corp, the ability to max out the Solo 401K on less income allows you to declare more of your income a dividend (and thus less as salary) saving you even more in Medicare tax.  (I wouldn’t recommend trying to get your income low enough as a physician that you’re going to save any Social Security tax.)  The paperwork for establishing and maintaining a Solo 401K is slightly more difficult than a SEP-IRA, but still no big deal. Solo 401Ks also sometimes offer a loan option, like other 401Ks, but which you cannot get in an IRA, SEP or otherwise.

However, the question of where to open a Solo 401K isn’t nearly as straightforward.  My normal default in questions like these is to go to Vanguard (and I did).  However, this decision isn’t the “no-brainer” that going to Vanguard usually is.  Like the Vanguard brokerage, the Vanguard Solo 401K has some issues.

Vanguard

Insuring-Income-250x250-bannerThe Vanguard Individual 401K offers the Roth 401K option and all of the Vanguard mutual funds.  However, there is no brokerage option, so buying ETFs, even Vanguard ETFs, and mutual funds from other fund companies isn’t an option.  You cannot even get Vanguard’s less expensive Admiral shares, just the admittedly slightly more expensive investor shares.  The Vanguard Individual 401K also doesn’t accept incoming IRA rollovers, an important issue if you have a large traditional IRA you would like to rollover to a Solo 401K in order to allow Roth IRA contributions through the backdoor.  There is also no loan option, if that is important to you.

Fidelity

The Fidelity Self-Employed 401K Plan has a brokerage option (through which you can buy Vanguard and other ETFs) and its low cost Spartan index funds.  However, I have been told it has no Roth option, although the plan document doesn’t say that.  [Update:  Fidelity has confirmed to me that they do not have a Roth option for their individual 401(k).] It does, however, accept incoming rollover IRAs, so this is a great option if you need to do that in order to start doing Backdoor Roth IRAs.  Fidelity also offers 401K loans [Update: A reader has assured me that Fidelity most certainly DOES NOT offer 401(k) loans.]

Schwab

The Schwab Individual 401K Plan allows you to buy Schwab funds/ETFs for free and Vanguard ETFs for $8.95 per trade.  They do not allow loans, but the plan document does state that a Roth option is available.  To add to the confusion, the plan document states you CAN take out loans. [Update: A reader called Schwab- the Roth option is not available despite what the plan document says.]  It seems to accept 401K/403B/457 rollovers, but not IRA rollovers.

ETrade


The Etrade Individual 401K Plan allows Roth contributions and obviously has a brokerage option with $9.99 trades for any ETF.  They accept IRA rollovers and allow for loans.  They also will pay you if you transfer your current Solo 401K to them, $200 for $25K-$99K, $300 for $100K-$249K, and $600 for a $250K+ plus plan.

TD Ameritrade

The TD Ameritrade Individual 401K Plan offers full brokerage services including a number of commission-free ETFs from Vanguard and Ishares.  They have less information on the website than the other providers, so I am unsure as to the availability of loans, a Roth option, or whether or not they accept IRA rollovers.

Vanguard Fidelity Schwab Etrade TDAmeritrade
Index Funds Investor Shares Spartan and ETFs ETFs ETFs ETFs (some commission free)
Roth option Yes No No Yes ?
Loans No No No ? Yes ?
IRA Rollovers No Yes No Yes ?

There are at least 13 other Solo 401K providers, but I’d recommend choosing one of these 5.  Head to head, Etrade seems like the best overall option to me.  Perhaps when my plan hits $25K I’ll roll it over and collect that $200.

What do you think?  Where is your Solo 401K?  Why did you choose that one?  Comment below!

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Comments

Where To Open Your Solo 401K — 88 Comments

  1. Say you are a military physician and contribute the max to your TSP. If you moonlight as an IC can you also open a Solo 401(k)? If so can you max it out or just the difference between the $52k and the $17.5k you put in the TSP?

    Is your Solo 401(k) set up as a Roth so that you can do your backdoor conversions? Couldn’t you just have a Roth IRA that will accept rollovers for the purposes of backdoor conversions? Then your Solo 401(k) could be traditional and give you more tax sheltered space.

    • You can open an individual 401K, and put almost 20% of what you make moonlighting into it. I’d probably make it a Roth Individual 401K if I were in the military, but either would be fine. The main problem with moonlighting in the military is you get pounded with payroll tax since you usually haven’t yet hit the maximum Social Security income limit.

      My Individual 401K is traditional to help keep me out of the 33% Federal bracket. 401Ks, unlike SEP-IRAs, aren’t counted in the pro-rata calculation so important with Backdoor Roth IRAs. Roth IRAs can accept Roth rollovers, but if you want to rollover a traditional IRA (for which you actually took a tax deduction at some point) into a Roth IRA, you have to pay taxes on it.

    • I was active duty. You can max the TSP and then open a SEP for your moonlighting.
      You cannot put 17500 into TSP and solo401K.

      My advice is max the TSP. It is very low cost provider.
      Then max your SEP-IRA.

    • I have navigated this from many perspectives.

      In 2010 and 2011, I had W2 income as an Active duty Army “employee” with TSP(401K) and 1099 income for moonlighting. I maxed the TSP and was able to max a SEP as well.

      In 2012 my income was all 1099 so I opened a solo 401k with Fidelity. I was able to max it with a 17000 “Employee”(salary deferral) contribution and a 33000 “employer”(profit sharing) contribution. It help me save an addional 17000 dollars for retirement that year. I have not done the calculation for this year.

  2. Thanks for the summary of what’s available – I tried doing this research myself over the past few months and patched together my own comparison. I ended up going with Vanguard for my Solo401k. It was an easier set-up than I anticipated and I opened it last month. As for my decision to go with Vanguard, I wanted the Roth option and didn’t need the rollover or loan options, so it was therefore a “no-brainer” based on comfort-level/respect for the company.

    My biggest regret is that I didn’t open a Solo401k sooner; for me, it’s much preferred over a SEP-IRA because of the higher maximum contributions.

    E*Trade’s current bonus cash incentive is indeed tempting. While I didn’t choose them for the new Solo401k, I did opt to move my existing SEP and Roth accounts to E*Trade to avail of that bonus and the initial free trades. I intended to try them out for a while and perhaps later transfer those accounts to Vanguard. So far, I’m very pleased with E*Trade.

    • It sounds to me like you do need the rollover option if you have a SEP-IRA. You’re missing out on the personal and spousal Backdoor Roth IRA if you have a SEP-IRA.

      My Individual 401K is at Vanguard, but unlike you, I actually don’t need the rollover option.

      A Solo 401K only allows a higher contribution than a SEP-IRA up to a certain incomes (~$266K for 2013, about $5K higher for 2014). If you make more than that it’s the same maximum ($52K for 2014).

      • Thanks for your comments. My (faulty??) thinking was that there was no urgency in rolling over my SEP-IRA into a solo 401k – the investments in both accounts are/will be similar – they’ll just be separate accounts until I decide (at some point in the future) to merge them. In the meanwhile, new (employer and employee) contributions will go to the solo 401k exclusively. Am I missing something by keeping these separate?

        Frankly, I don’t completely understand the whole backdoor Roth IRA discernment process enough to know if this is something applicable/advantageous for my particular situation, but you’ve got me wondering. My spouse and I contribute the max to our respective Roth IRAs annually, and to our respective 401k plans. I wasn’t aware there was anything else that we could do. Sorry for the possibly ignorant question, but how does having a SEP-IRA make for consideration of a backdoor Roth IRA?

        • If you are able to max a ROTH annually there is no need for the “back door”. This is just a strategy if you are phased out of the ROTH based on income.

        • If you’re eligible to make direct Roth IRA contributions, then you don’t need to do the backdoor Roth (nor can you) and can just keep the SEP-IRA. Many, but not all, physicians have too high of an income to make direct Roth IRA contributions. If you’re filing Married Filing Jointly, that limit starts at a modified adjusted gross income of just $181,000. That’s before your itemized deductions.

    • The Vanguard Solo 401K simply doesn’t offer a brokerage option.

      I’ve never used the Vanguard Brokerage, and even with the brokerage I do use (Schwab) I only make about 8 transactions a year. But people who use a lot of ETFs instead of mutual funds occasionally complain about the quality of service at the Vanguard brokerage compared to Fidelity or Schwab.

  3. An important point to be made about solo 401k is it consists of the employee contribution ( 17,500$) and employer contribution ( 20-25% of profits). Together these cannot exceed 52K$ for one job.
    So if you have a regular ( W-2) job, and you contribute 17,500$ to that 401K, which you should especially if you have a employer match.
    Then if you have a side job where you are a independent contractor/ buisness owner, you can only contribute the employer contribution ( or 20-25% of profits).
    My point being you only have one ” employee contribution” space of 17,500 no matter how many jobs/buisnesses you have

    • That’s correct, except the employer contribution works out to 18-19% of profits. IRS Pub 560 has a worksheet where you determine your maximum contribution, but it is basically 20% multiplied by the sum of your net profits minus half of your payroll taxes.

      • So if your side job independent contractor was set up as a sole proprietor can you do the employer contribution or would that be a case for being set up as an LLC or S Corp?

        • LLC/S Corp/Sole Proprietor has nothing to do with it. You can do the employer contribution for all of those business structures.

          LLC does nothing for your taxes or retirement contributions unless you elect to be taxed as an S Corp. An S Corp saves some payroll taxes, but doesn’t provide additional retirement plan options.

  4. TD Ameritrade allows you to select whether or not you want to allow the ROTH option, Loans, and IRA rollovers in the adoption agreement. For an individual 401(k) plan I typically just set up all three to allow for maximum flexibility. My only disclaimer is this is TDA institutional – I’m not sure the retail side is exactly the same, but I would imagine it is…

    • Yes, TD Ameritrade allows the ROTH option on the retail side as well. Lots of commission-free ETF’s to choose from on their trading platform. All of my retirement accounts are with TDA, and I have been very happy with their customer support when I’ve needed it.

  5. Via email:

    Your link to 13 other Solo 401K providers, links back to AMTD’s page, not a list of 13 other providers. I was going to add PayChex and Employee Fiduciary, but didn’t want to list them if they are on the list you meant to link to.

    Adding administrative costs would be a good part of this post also. Set-up and annual fees can add up quickly with some.

  6. I am in the process of rolling over my SEP IRA to a Solo 401k in Schwab, and in the process get out of my high ER managed fund of funds (thanks for showing me the error of my ways.) I notice you prefer ETFs over vanguard funds. Other than the slightly lower ER, what other benefits do you see with such decision? My plan was to convert everything to a 3 fund plan with the appropriate asset allocation. total stock, international and total bond in a 60/20/20 ratio. I may consider increasing the TBM up to 30%. If feel my biggest hedge is my earning potential and time a still have left in the market. I’m 37

    -Thanks

    • If you are rolling to Schwab you might want to consider using their ETFs to create the three fund portfolio http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs/schwab_etfs/market_cap_index_etfs
      The advantage for a long term investor is low expense ratio and no commission. If you use the Vanguard funds inside of Schwab you will pay a high commission (I want to say it is $72 round trip).
      If you are set on using Vanguard funds I would suggest looking at opening the account at Vanguard.

      • I use Vanguard ETFs at my Schwab brokerage in my regular 401K because the commissions are so much lower than Vanguard mutual funds. Since my Individual 401K is at Vanguard, I just buy the funds. I choose purely based on cost and convenience. I prefer funds, but I’m not willing to pay more for them.

        Your asset allocation is probably fine, but expect to lose a lot of money in the next bear, perhaps 40% of your portfolio if it is really bad like 2008. If there is even the slightest concern you can’t handle that kind of volatility, then I would suggest a less aggressive portfolio, at least until you pass through your first bear market.

  7. It also looks like TD provides a cash incentive https://www.tdameritrade.com/specialoffer.page When you go to open the account you just have to click all account types.
    I mostly use DFA funds on the equity side of things, so I use the 60 days of free trading to establish my positions in mutual funds then manage systematic buys and sells from there, so I rarely pay a ticket charge / commission. I’m not sure if anyone else uses this technique, but I save the $16 commission (negotiated rate) on monthly purchases/sells. On a small account this is critical on a large account everything helps, but becomes less significant.

  8. Good post. Be careful with some of these comparisons. They aren’t apples to apples in the services they offer. For example, EF handles a lot of the paperwork for you, such as the Form 5500. Others do not. For a Solo 401(k), that might be worth saving the money since you don’t have to worry about it being a safe-harbor plan. Make sure you understand what you are not paying for.

  9. Most hospital employed physicians are limited to 401k accounts ($17,500 per year) for the tax deferred accounts, unlike private practice where you can defer up to $52,000 in a 401k/profit sharing plan. Any suggestions, other than back door Roth and stealth IRAs to maximize tax deferred and tax free savings?

      • Separate from my employed hospital position.. I give pharma sponsored talks that brings extra income that can range from 2-5k a month. The pharma company send the checks directly to me but I am debating whether it’s worth the time, effort and more importantly money to form a consulting side business? I guess as s corp or llc? I’m new to this thought…

        Great website and post, definitely appreciate the information

        • You already have a side business. It’s called a sole proprietorship. You may wish to become an LLC or corporation for liability reasons (probably not much in your side business) and for tax reasons (if you pay as an S Corp you save on some Medicare taxes).

            • I was wondering the same thing.

              I’m currently employed (receive W2′s), and contribute $17.5k to my employer’s 401k. If I obtain a steady 1099 income, would a recommended setup be to form an S-corp, and contribute a portion of that income to a Solo 401k up to a max of $52k – $17.5k?

  10. I have used 401kadministrators.com in La Jolla for the past 7 years. Allows investments in Vanguard funds and fees only 0.25%. Allow loans (which I think is useful) up to 50k.
    My problem with the 401k at Vanguard was it didn’t allow any employees, even those working less than 1000 hours year i.e. your children.

  11. Excellent article, Doc! Can you expand a bit on the ‘back door’ Roth – I know you’ve covered it before (and I have a ‘file’ of your previous postings…) – can you even just tell me which previous post/date has that info?
    After being an employed physician for 8 years, I find myself self-employed again. Not sure what retirement plan my ‘partners’ have setup – but I’ll be discussing this article with them Monday. Thanks.

  12. Do any solo 401ks offer after tax sub-accounts (so you can do the equivalent of a backdoor roth with a 401k)? Not a physician, but I imagine this would be useful as it would require less income to double up on the 415 limit, something that often seems available to physicians.

    • I don’t know of any that offer after-tax sub-accounts. I’m not sure any 401K can do that if it allows you to exceed the 415 limit. The TSP allows for after-tax contributions while deployed, but as I understand it, only up to the 415 limit total.

      • Not what I meant. You can take advantage of the 415c limit multiple times by, for example:
        1) having your solo 401k for your business and having another practice with partners with it’s own 401k or
        2)having your solo 401k for your business + regular employer 401k.
        Each gets it’s own 415c limit (http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer&n=78). I think you posted on this before, but I may be misremembering.

        For the subaccounts, with 401ks set up the right way (though I have not heard of this offered in solos), you can contribute to the after tax sub-account 100% of your salary up to 52k – in full, min(52k-employee contribution-match, salary-employee contribution-match).
        and then do an in-service non-hardship withdrawal to your Roth IRA.
        This will allow you to:
        1) max out the 52K limit at a significantly lower income. if your income is insufficient to max it out the normal way.
        2) take advantage of the 415c limit at employers where your employee + match is under 52K, provided this option is available.

  13. This question is somewhat not related, but I need some advice. I was not in the military, but thanks to my dad I can use USAA. I am still in residency, but changed employers and have a 403b I need to rollover. I was planning to go with USAA, but noticed WCI never mentions them nor seems to use them for financial planning. Is there a reason for this?

    • USAA is great for insurance and decent for banking. You could roll over to a brokerage and have access to any ETFs or mutual funds, but will pay higher transaction fees to do so. Their own offering of mutual funds is very limited, as are their overall investing options. If you are looking to roll over to an IRA then your best bet is to go with Vanguard.

      • I use USAA for insurance and banking. I have a home equity loan on my investment property with them. But I agree their investing options are disappointing. For most investing-related stuff, using Vanguard or Fidelity is a far better choice.

    • I have been with USAA for decades for insurance and banking/brokerage, plus used them once for comprehensive financial planning. What I learned was that their financial planning advice is limited to the products they offer and therefore their financial planning was not helpful to me (i.e.- no mention of solo401Ks because USAA doesn’t offer solo401ks – that was a costly omission in my particular financial situation). My insurance and some banking (credit cards) will stay with USAA, but my investments are now with Vanguard and ETrade.

  14. I have a 403b and 457 account with a $17500 limit for each. That equals $35k. I also get a hospital match of about $10k. Can I start a side consulting business and put in 20% of the income to make my personal contribution $52k or do I have to include the $10k hospital match? It’s a difference of another $17k vs. $7k.

    Also can the hospital pay me separately as a consultant if I do non-clinical admin work?

    • Yes, they can pay you as a separate business “as a consultant” for non-clinical work. If your regular pay is W-2 (employee) they could pay you 1099 (independent contractor) pay as a separate business. You could use your 1099 income to fund a Solo 401K or SEP-IRA with a maximum contribution for 2014 of $52K.

      The $52K (2014) limit is per employer. That includes your contribution to a 403B and the match from the employer. So you’re limited to $27.5K at your main job. The 457 is separate. Neither has nothing to do with your Solo 401K at your other job, other than you only get one $17.5K “employee” contribution total no matter how many jobs and 401Ks/403Bs you have, and that is going into your 403B. So you’re limited to 18-19% of your 1099 income up to the $52K limit into a solo 401K/SEP-IRA.

  15. Hi Jim,

    I’m meeting with Fidelity this coming week and will get an update on the Roth option. We’d asked them to add it earlier last year and they were working on it. I’ll get a status update posted once I connect with them.

  16. So heres a quick scenario:
    Salary: 140k
    1099 job: 35k
    Tax Rate: 28% Federal, 9.3% State
    Age: 33

    I placed 30k into a taxable account with vanguard 1/18/14. As of today I made $80. Just learned about individual 401k so now I want to put the money into a individual 401k which I can contribute ~23k. I plan to buy a home in about 3-5 years so I like the idea of the 401k that way I can max it out and not worry about saving as much money for the down payment since if push came to shove I could borrow 50% of what Ive invested (although I am still confused about this possible double taxation concept).

    Question:
    1) Should I make my solo 401k with Vanguard since I’m already with vanguard and my preferred funds are Vanguard index funds (VTSAX & VTIAX) an then transfer to Etrade when Im ready to take a loan out in 3-5 years? OR Should I invest with ETrade right off the bat (since you cant invest in the low cost admiral shares at vanguard with a solo 401k would the ER actually be lower at ETrade even with the fees since I wont really be trading much but instead only buying VTSAX & VTIAX monthly)?
    2) I will have some more money to invest. Since my job offers a 40b I cant get a tax deduction for an IRA so I was going to contribute $5500 max to a traditional IRA then do a backdoor Roth conversion. With any extra money I have after that should I invest/ store it in: a) high yield savings account (Ally 0.85%) b) crappy 403b life insurance annuity with salary job(net expense ratio: 0.93% ER + 1.4% mortality & expense fee = 2.37%) c) mutual fund in a taxable account with Vanguard d) 5 year CD (Barclay 2.15%)

    Thank you so much for all your help and I love the blog…

    • 1) You can’t borrow from a Vanguard Solo 401(k). If that is your plan, probably ought to open it elsewhere. You’d want to buy the ETFs at eTrade, not the funds I suspect. Depending on how much you spend on commissions, the commissions may be more money than the lower ER.

      2) First set your goals, then your asset allocation, then choose your investments. If it is short term money or needs to be very safe, then MMFs or CDs are appropriate. If it is retirement money, then stocks (probably via a mutual fund) are appropriate.

      Even a crappy 403(b) like yours may be worth using if you won’t be at the job very long.

  17. 1) I am aware a i401k loan is not an option at vanguard but I could always move it from vanguard to etrade a month before I need the loan. Nevertheless, I looked into this further and it seems with eTrade I could invest in VTI (which is the ETF for VTSMX) and it’s ER is only 0.05% (the same as VTSAX, which is the low-cost admiral version of VTSMX but at vanguard you cannot invest in admiral shares or ETFs within a i401k) thus only by using etrade can someone invest in the Vanguard Total Stock Market Index Fund at an ER of 0.05% In addition, I plan to make a one time annual lump sum contribution to my i401k every year (~$23500 which I would do at the begiunning of each year to max returns) at vanguard I would be charged $20/ year while at etrade I would be charged $9.99/year. Seems like etrade is the way to go right?

  18. If doing a solo 401k as independent contractor, does the employee contribution to the solo 401k have to come out of the income of a 1099. So I one makes only 10k of 1099 income, can you still put in 17k into that account, or are you limits to the 10k (assuming no other outside 401ks).

  19. What happens if one year I decide to stop moonlighting and have no further 1099 income, only W2, would I have to terminate/rollover the solo 401k, or can I keep it but just no longer contribute?

  20. Thanks for the info. I was afraid I would have to terminate it or roll it over into an IRA if I no longer qualified to for an individual 401k.

  21. I currently have a 401k with an employer but will be transitioning to become a Sole Proprietor soon. I took out a 401k loan through the employer for a first home. Can I roll over the 401k loan along with the rest of my 401k to Solo? I have read conflicting information about whether this is an option.

    • I do not believe you can roll over a loan. In fact, I think it is quite clear that you have to pay it back rapidly when leaving a job or it is treated as a withdrawal (taxes, penalties, and lost tax-protected space.)

      • Yes, I left my previous employer and they wasted no time sending me the 1099 for the amount of the loan. If you can, try to pay it off before you leave or ask them how long you have. I think you may have only 60 days.

  22. If you are going to place all your 1099 income into a solo 401k, do you still need to file a quarterly tax filing?

    • No. If you’re not going to owe any taxes, your estimated taxes are zero. Keep in mind the only way to put all your 1099 income into a Solo 401K is via the employee contribution. So make sure you haven’t done an employee contribution into another 401(k) somewhere because you only get one per year.

  23. Very interesting thread — particularly the parts above about not needing an s-corp to get an individual 401k.

    I have additional side income from non-medical consulting, about $7500/yr. My wife has similar setup, for a total of about $15k per year. I am a solo practitioner with 2-3 employees and am in the process of setting up a retirement account. My marginal tax rate is around 38% (thank you, California).

    My plan was to set up a SIMPLE IRA for my medical practice and contribute max 12k, plus the 3% match. I chose this over a 401k because of the administrative costs of $2-3k for setup and administration plus fiduciary duty. She has a 403b which we are planning to max out. I was then planning to set up Consulting, LLC to run our consulting income through so that we could get more “employer” match.

    If we were to form the consulting corp in which we were both partners, it would receive about $15k in income. We would have $800 in corp taxes and maybe $400 or so in accountant fees. This would yield $13,800 in remaining funds. If we set up an individual 401k, had the company contributes the maximum 25% or $3,450 in retirement and we deferred 100% of our income from our salaries of $5,175 each ($10,350 collectively), then we would gain access to an additional $3,450 collectively in tax protected space. We would have to reduce our own personal “main job” tax-deferred retirement account contributions ($17,500-$5,175=12,325 for her in her 403b and $12,000-5,175 = 6,825 for me in the SIMPLE IRA), but our total personal contributions would remain the same at $17.5k between all retirement accounts, my personal company match would be the same at 3% (she does not have a company match), and we would gain an additional $3,450 in tax deferred retirement space. The tax savings on this $3,450 at our anticipated state+federal tax rate of 37.3% would be $1,286.85, which is more than the cost of the corp taxes plus tax filing fees ($800 + $400 + e-filing fees).

    In 2 yrs, I would probably be in a place where a 401k for my solo practice makes sense and at that time I would roll the SIMPLE IRA over to the individual 401k, then start the backdoor trick.

    Any suggestions/critiques of this reasoning? How do you make “employer” contributions to a 401k if you don’t have a corp set up? Do just file a “business” with the city and file directly on your 1040 with the employer contribution listed as a business deduction?

  24. Schwab DOES NOT allow Roth/post-tax solo 401k. Their open account forms and telephone representative verified this. Also note a $20 yearly fee per fund held in a vanguard solo 401k. I love your blog wci, but please update this article.

    • Oh, it’s the table. I couldn’t figure out what you were referring to. Thanks.

      Not sure what the $20 per fund at Vanguard is. I’m certainly not paying that in my Solo 401(k). Is that the fee for not doing electronic notices?

      Update- NM. The fee is if you’re not Voyager at Vanguard (which I am.) $20 per fund per year until you hit voyager. That shouldn’t take long for a doc doing Backdoor Roth IRAs and maxing out a Solo 401K. Maybe a year or two.

      • It takes more than two years to get $50,000 into a Vanguard account for a resident investing only in a work provided retirement account, a Roth IRA, and a solo 401k from meager moonlighting income :( .

        To me it seems to be a mistake for Vanguard. Their minimums on multiple account and low cost fund types mean my preliminary (small) investments are being placed with Schwab instead. As I become an attending with 6x or more yearly income I’m much more likely to continue investing with Schwab.

  25. Thanks, WCI.

    I am a W-2 employee and my wife is an independent contractor with a salary less than 17K. If she opens up a individual 401K, can she contribute all of her income without having to file any taxes?

    A related question. I have an IRA with Vanguard that I need to rollover to somewhere in order to contribute to the backdoor roth. The only option I have right now is to move it to my current 401K (Not the best option given the investment choices within my 401K). Is it possible to rollover my Vanguard IRA over to wherever my wife opens up her Solo 401K (Assuming she opens either Fidelity or Etrade that allow rollovers)?

  26. I’m still confused about the Roth option. I have a TD Ameritrade solo 401k Roth, but I understand that’s only for the employee contribution. For the employer contribution, do I need to open a separate (non-Roth) account? Does that require a different set of plan documents too?

  27. I’ve been reading about the benefits of a solo 401, and I am wondering if we could contribute to it…My husband is a partner in a medical group (not a solo business)- and has an employee 401 K( contributions limited 17.5k), is there a way he can also open an individual 401 K ( to increase the contributions to 52K)? Thanks..

    • Yes. He can start another business. You have to be self-employed to have a Solo 401(k). Your husband can either do some independent contractor work or start a business in another line of work and start one. A better option would be for him to convince his partners to combine the 401(k) with a profit-sharing plan (raising limits to $52K) and possibly even adding a defined benefit plan on top.

  28. Hello,
    This is a very informative post, together with the Mega Backdoor posts. Thank you. Two questions:

    1) Can the profit share contribution into the pre-tax, Indiv 401k be rolled over into a TIRA and convert to a ROTH IRA for mega back door? Etrade says they will do it, but they have no comment on whether it is kosher.
    1a) Can this be done only in entirety or partial accounts?

    2) If I cannot do #1, can I put in my $17.5 deferral into ROTH 401k and then the remaining profit share contribution into a SEP in the same year? And then of course convert the SEP into a ROTH that year?

    Thanks,

    • 1) If the 401(k) allows “in-service rollovers” then you can do it. It’s the 401(k) rules that govern, not the IRS rules. Most, but not all, 401(k)s require you to separate from the job before you can do that. If etrade will allow it, then great, I wouldn’t expect any issue with the IRS.

      2) I don’t think you can do that. I think that for each job it’s one or the other in any given year. If you make enough income, you can just do it with the SEP-IRA, but of course you can max out a solo 401(k) on less income and the SEP-IRA must be empty at the end of each year in order to do the backdoor Roth.

      Here’s a great resource/chart on this subject:

      http://taxmap.ntis.gov/taxmap/pubs/p590-008.htm

  29. Great Post!

    I just got done reading your book and opened up an solo 401K with Schwab. Just graduated residency in July.

    From a tax standpoint is there any difference between employee or employer contributions? Is one better? For an LLC being taxed as an S-corp, both aren’t subject to income tax correct?

    This year I will only be able to contribute less than the 17,000. Is there any difference between having say 12,000 as elective employee contributions, or should I still have my LLC contribute?

    If employer contributions count as salary that you are not taxed on, my thought is that by having a high employee contribution, this would help increase my salary without increasing my taxable income, allowing the distributions that I take to comprise a smaller percentage.

    What do you think?

    • Mike Piper addressed this issue here:

      http://www.obliviousinvestor.com/solo-401k-contributions-employee-or-employer/

      He suggests they’re equally advantageous, but I think he’s making the assumption that the employer contribution would be passed to you as an S Corp dividend (not subject to payroll taxes) if you didn’t put it into the 401(k) as an employer contribution. If you instead were going to take it as salary, then of course better to put it into the 401(k) as an employer contribution and call it a business expense.

      The other benefit of doing employer contributions is that you can then use your employee contribution ($17,500 total across all 401(k)s at all jobs) elsewhere, perhaps where a Roth 401(k) is available if that’s useful for you.

      Great question. Maybe I ought to get my LLC taxed as an S Corp and save a few bucks.

      • This discussion is timely for me as I’m trying to decide about changing the taxation (and/or legal) status of my LLC to an S Corp or a C Corp. As Mike Piper points out in his abridged description of LLC/S/C’s, there are a lot of different considerations for the “right” one for a business. My interests are to be able to deduct employer solo 401k contributions as a business expense and to have more control on reportable personal/business income year to year (“income-splitting” in a C Corp). Anyone else discerning between S corp and C corp?

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