Why A Solo 401k
You might be asking why I’m considering a solo 401k versus a SEP IRA or other self employed retirement savings options. Well, it all comes down to circumstance and how much you can save.
Let’s look at two scenarios that are similar to mine. First, in the past, I only saved in a because my income was lower and I was still maxing out my 401k at work, so I didn’t need any additional employee contributions.
With both a SEP and Solo 401k, on $30,000 of income, the employer contribution is $5,576.11. Since I was already doing the $20,500 at my primary employer, that amount didn’t make a difference.
However, fast forward to today, the business makes much more income, and my wife is now working for the business. As such, it can make a huge difference in savings and lowering our taxes. Let’s assume that the business is going to make $100,000 this year. That means that the business can contribute $18,587.05 to both my 401k and my wife’s 401k. Plus, my wife can contribute $20,500 of her salary to the 401k as well .
As such, the solo 401k provides much more savings options, and lower taxes today as a result. The reason: when you are self-employed, you can make both the employer and employee contribution – up to the limits!
Related: 401k Contribution Limits
The 6 Best Solo 401 Companies Of 2022
- Best for Account Features: E*TRADE
- Best for Mutual Funds: Vanguard
- Best for Real Estate: Rocket Dollar
Get $100 when you open a new, eligible Fidelity account with $50 or more. Use code FIDELITY100. Limited time offer. Terms apply. Offer Disclosure.
Fidelitys self-employed 401 plan is our best overall pick due to a combination of very low fees, a wide range of investment choices, and the companys emphasis on retirement savings.
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No regular account fees and no commissions for stock or ETF trades
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10,000+ no-transaction-fee mutual funds including four Fidelity funds with no fund expenses
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Retirement resources including calculators, apps, and education resources to help you improve your retirement savings and investment strategy
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Some active traders may want more powerful active trading tools
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No electronic deposit for contributions
Fidelity self-employed 401 accounts are a great choice for fee-conscious investors, earning our top overall pick. The Fidelity solo 401 charges no opening or closing costs and no annual maintenance fees. Customers can invest in stocks, ETFs, and over 3,400 mutual funds with no trading commissions. That means many small business owners could use this account without ever paying any fees to Fidelity. If you need help to place orders, however, the $32.95 broker-assisted trade fee may be an impediment.
Read our full Fidelity review.
Vanguard Solo 401k Plan Document
Starting a Solo 401K at Vanguard is easy. If you are already a Vanguard client, you can set the account up online by logging into your account and choosing Individual 401K. If you dont have an account with Vanguard right now, you must call 1-800-992-1788 and a representative will walk you through the process.
Before you can apply for a Solo 401K, youll need an Employee Identification Number. You get this number directly from the IRS and it only takes a matter of minutes as they provide it to you instantly. Head to the IRS website and complete the required information to get your EIN.
Beyond the EIN, youll need to sign a few Vanguard documents, which they will send to you. Youll need to sign them and send back the originals, but make sure you keep a copy for yourself.
As a part of the process, youll also need to choose a plan administrator. Many business owners choose to handle it themselves, but if you dont want the responsibility, you can assign it to your spouse or your accountant .
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Best For Mutual Funds: Vanguard
Vanguard
Vanguard is well-known for its own mutual funds and ETFs. If you prefer investing in Vanguard funds, a Vanguard Individual 401 plan gives you easy access with no trade costs, making the company our review’s best choice for mutual funds.
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No fee to establish an account
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Trade the Vanguard family of funds with no commissions or load fees
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Roth contributions allowed
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$20 annual fee for each Vanguard fund held in this type of account
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401 loans are not supported
If youre looking to stick with a well-respected list of mutual funds from Vanguard, choose the Vanguard Individual 401. The account doesnt have an annual fee on its own for accounts with at least $10,000 in Vanguard funds. It charges a $20 annual fee below that balance plus a $20 annual fee for each Vanguard fund held in the account. Depending on how you invest, this fee can add up fast and could be a reason to consider buying those Vanguard funds elsewhere. You can also trade stocks and ETFs with no commission, in addition to options and fixed-income investments.
Vanguards founder, the late John Bogle, is credited as a pioneer in index investing, bringing the first index fund to market in 1976. Vanguard remains a leader in investment funds as the second-largest asset manager in the world with about $7.2 trillion under management.
Read our full Vanguard review.
Options Designed For Self
If youre self-employed* and looking for other options, you might consider a SEP-IRA, a SIMPLE IRA, or an Individual 401. For all of these options, youre the employer and the employee.
A SEP-IRA is easy to set up, and you can even establish an account after the end of the calendar yearyou only need to open and fund the account before the tax-filing deadline.
2. SIMPLE IRA. A SIMPLE IRA features both employee salary deferral contributions of up to $13,500 for the 2019 tax year and an employer matching contribution of up to 3% of compensation.
A SIMPLE IRA is also easy to establish, but the deadlines are stricter. Generally, you must open a SIMPLE IRA by October 1 to contribute for the current tax year.
3. Individual 401. An Individual 401 could be a cost-effective and appropriate option for business owners with no employees . They offer potentially higher contribution amounts and the flexibility to choose either pre-tax or Roth employee salary deferrals of up to $19,000 for the 2019 tax year.
Employer contributionsare identical to the SEP-IRA .
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Best For Real Estate: Rocket Dollar
Rocket Dollar
Rocket Dollar allows you to invest in anything you can pay for with a checkbook. That means you can invest in real estate and other non-traditional assets while enjoying the tax advantages of a solo 401 account.
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Checkbook control allows you to invest in real estate and other alternatives
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Support for 401 loans and Roth contributions
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Option for upgraded account that includes free wire transfers, checks, tax form filing, and other features
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Basic accounts require $15 monthly fee and $360 setup fee
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Premium accounts require a $30 monthly fee and $600 setup fee
If you dont want the limitations of traditional financial markets, you may want to consider Rocket Dollar. Instead of stocks, ETFs, mutual funds, and bonds, Rocket Dollar accounts give you the control to buy any asset with your solo 401 that the IRS allows. That can include rental properties, fix-and-flip real estate, or land that you think will appreciate in value. You can invest outside of real estate as well, such as private investments in a startup or precious metals, however, Rocket Dollar’s flexibility makes it the solo 401 that’s best for real estate.
How To Transfer Your Plan To Vanguard
You can follow these steps to get started.
Step 1
Gather your information
Here’s what you’ll need to prepare for your transfer:
- A plan statement dated within the past 90 days from the company that currently holds your account.
- The plan number and dollar amount currently invested in the plan.
- The type of plan you want to transfer ).
- Your Vanguard account number .
Step 2
When youre ready to get started, give us a call at 800-992-7188.
- Well guide you through the process to ensure its as seamless as possible.
- A qualified representative will let you know which documents are required to complete the transfer and answer any questions you have.
Step 3
Track your transfer
- Once we receive your request, well initiate the transfer and send you an email that explains how you can track the status of your transfer online.
- Once your transfer is complete, well send you an email confirmation.
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Vanguard: Is It Trustworthy
The Better Business Bureau has given Vanguard a B rating. BBB ratings typically range from A+ to F and reflect the bureau’s opinions of a company’s customer complaint history, business practices, and advertising and licensing information.
Other factors the bureau considers include time in business, type of business, and government actions. But the BBB also states that its ratings don’t guarantee a company’s reliability or level of performance. For this reason, it’s important to conduct your own research as well.
Vanguard has closed nearly 300 complaints in the last 12 months, and it currently has two unresolved complaints, according to BBB data.
Why Choose A Plan
There are many options for setting up a Solo 401K account, but Vanguard offers a great option for side hustlers and those that own their own business.
Vanguard doesnt charge a setup fee for the account, but they do have some limitations. For example, you cant take a loan on your money, no matter the balance. The only way you could access your funds early is with a hardship withdrawal before the age of 59 ½, but you must qualify for it. This is also consistent with an owner-only plan.
Vanguard does charge some trading fees, but they are minimal and some are avoidable. Most commonly, investors pay a $20 per fund annual fee. If you have several funds, youll pay the fee for every fund you have, which can take away from your profits, so keep that in mind when choosing your investments.
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Vanguard Vs Fidelity 401k
We have many clients who are comparing a Vanguard plan to a solo 401k plan offered by Fidelity. The truth is we are fans of both plans.
We have contacts at both companies and are familiar with both plans. The reality is that the business owner needs to decide which company they would rather work with. It usually comes down to which one you currently have accounts with.
It might make more sense to you to open up an account with a company that you are already doing business with. That way you can use their app to consolidate your financial holdings.
Accessing Your Individual 401
Vanguard has a separate website for small business customers. While I can view my Individual 401 using the normal user name and password Ive had established for years, the Individual 401 requires me to establish a new user name and password for the small business side. All contributions, both employer and employee, will need to be established using this alternate user name. I dont particularly like having two separate user names for the same brokerage.
After Vanguard processed my paperwork and established my account, I received an email to link my new participant account. Logging in was a frustrating process at first because I did not know that a new user name was necessary. The small business website rejected my user name, and I called customer service for help. The representative was able to explain the above to me, and I established my account. Furthermore, you cannot be logged into the individual investor side of Vanguard.com and later log into the small business side. You must clear your browsers cookies in order for the login to work properly.
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How Do They Work
When you set up a Solo 401K, you are both the employee and the employer. In other words, you make both contributions, but one comes from your earnings and the other from your profit-sharing.
Employees can contribute as much as $19,500 per year toward your retirement account. If you make less than $19,500, you may contribute 100% of your earnings and again, if youre over 50-years old, you may contribute the extra $6,500.
You also contribute as the employer. This money comes from your companys profit sharing. Youll need the following equation to determine how much you may contribute as the employer:
- 25% x you earned income ½ of your self-employment tax
- The maximum contribution is $57,000 as an employer.
What Is A 401 Loan
A 401 loan is a loan you take out from your own 401 account. They work like normal loansâyou pay origination fees and interestâonly youâre borrowing money from yourself. According to Vanguard, 78% of 401 plans permit participants to take out 401 loans, and about 13% of plan participants have an outstanding 401 loan.
If you need money, you might consider taking a loan from your 401 if:
⢠You want a lower interest rate. 401 loans still charge interest. But the amount you pay may be less than on a loan you take out with someone else. 401 loan interest rates are based on the prime rate, an interest rate adapted from Federal Reserve loaning guidelines. 401 loans will normally be a percentage point or two above this rate, which may be lower than the rate you could get at a bank.
⢠Youâd prefer to pay interest to yourself. No one likes paying banks and credit card companies interest. While youâre still on the hook for interest payments with a 401 loan, you get to pay it back to yourself instead of someone else.
⢠You want looser credit requirements. If your credit score prevents you from getting the best rates on loans, you may opt for a 401 loan. Depending on your employer, you may not even need a credit check to borrow from your 401.
You might want to avoid a 401 loan if:
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Make Sure Your Investments Align With Your Goal
Do you know all the investments you own and how they fit together?
It’s an important consideration no matter what age you are or how long you’ve been saving, but your asset mix becomes even more critical when you’re only a few years from retirement.
It might be relatively easy to see what your allocation is for each accountby looking at your statement or checking your accounts onlinebut you’ll need to get a picture of your total retirement savings in order to know whether you have an appropriate asset mix overall.
And remember that the asset mix you settled on years ago might not be the best mix for you anymore. For example, you may want to consider moving some stock assets into bonds, to cushion your portfolio from volatility.
Actively Managed Funds Vs Passive Funds
Actively managed funds attempt to outperform a benchmark index. The portfolio manager selects securities for the fund according to the fundâs criteria. That means there may be more trades, more effort required by management and more taxable capital gains. This is also why fees are generally higher with actively managed funds. The minimum investment for most Vanguard actively managed funds is $50,000.
Index funds are passively managed mutual funds, where the goal is to match the performance of a certain index or benchmark, rather than outperform it. The fund manager will buy allâor a representative sampleâof the stock or bonds in the index. There are fewer trades, so there are usually fewer taxable capital gains. Fees are generally lower for passively managed index funds. For most Vanguard index funds, the minimum investment is $3,000.
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How Do I Register For Online Access To My New Retirement Plan
Please note: You’ll need your Social Security number and retirement plan number to register. Once you’ve registered, you’ll receive a confirmation.
Within Vanguard Small Business Online®, you’ll be able to add your organization’s banking information, view your participants, and easily make plan contributions.
Vanguard Frequently Asked Questions
Vanguard doesn’t impose an account minimum for investors, although some of its investments have $1,000 or $3,000 minimums. You can also trade stocks, ETFs, and options without commissions, but you’ll still be responsible for meeting the share price of each investment.
Yes. Vanguard’s simple interface, copious educational guides and market research resources, and automated investing accounts make it a suitable choice for those just getting into wealth-building. Beginners can still trade on their own, but you can alternatively use Vanguard Digital Advisor or Vanguard Personal Advisor Services if you’d rather leave the investment decisions to the professionals.
Yes. Vanguard offers a vast range of accounts that allow you to build wealth over time. Whether you’re using a self-directed brokerage account, automated investing account , IRA, or custodial account, you’ll have multiple options for making money.
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Who Should Get A Solo 401
Solo 401 plans are best for business owners who want the most flexibility in how they save for retirement. Before signing up for a Solo 401, you may also want to consider a SEP IRA or SIMPLE IRA as well.
Solo 401 plans take more paperwork to get started but offer more flexibility in what you are able to contribute. For example, SEP plans only accept employer contributions, while a solo 401 takes contributions from either the employee or employer. SIMPLE IRAs are available to businesses with up to 100 employees. SEP IRAs dont have that limit.
