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Self-employed 401k
Old 08-17-2017, 09:31 PM   #1
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Self-employed 401k

Folks, sorry to start a thread on this because I am sure is a tired topic but for some reason the search function is not helping.

I just transitioned from employee to part time consulting in 2017, so got somewhat excited (yes, lame I know) that in 2018 going forward I could contribute to a Roth directly because of the lower income.

Just now I am learning that "solo 401k" is a thing, and Google shows lots of outfits willing to sell one for one-man operations.

Appeal is the higher contribution limits.

Thanks, and appreciate any thoughts or links to previous threads.
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Old 08-17-2017, 09:40 PM   #2
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They work great. I've had one for 10 years, and it hasn't been much trouble.
Brief notes:
If/when the balance meets the reporting requirements ($250K?), don't forget to file the paperwork every year with the IRS.

It's not clear from your post--will you be doing a Roth Solo 401K? If you are doing a traditional (non Roth) solo 401K, just remember that all the dough has to come out eventually, and you don't want to save a nickel in taxes now only to pay a dime later.

I got mine with Fido, and they have been good. Vanguard didn't offer them when I opened mine, else I would have gone with them.
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Old 08-17-2017, 09:41 PM   #3
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I had a solo 401K with Vanguard for several years. This is the best resource for finding out what you can do:

Call them:

https://investor.vanguard.com/what-w...l-401k?lang=en
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Old 08-17-2017, 09:48 PM   #4
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Thanks!

So for round numbers, if one estimated consulting income at 100k, and wanted to front load the contributions but then the actual income was less at the end of the year...

It almost seems that it would be safe to do the max contribution only after one reaches it.

Which is fine too just trying to understand better,
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Old 08-18-2017, 07:19 AM   #5
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I had one with Fidelity for years. Easy to set up, never had a problem. It's a great option.
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Old 08-18-2017, 08:31 AM   #6
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Quote:
Originally Posted by DanP View Post
Thanks!

So for round numbers, if one estimated consulting income at 100k, and wanted to front load the contributions but then the actual income was less at the end of the year...

It almost seems that it would be safe to do the max contribution only after one reaches it.

Which is fine too just trying to understand better,
First, there are two parts to a solo/individual 401(k) plan: the employee/individual portion and the employer contribution/match. The employee is the standard $18K/year. The employer depends on your org type but is generally about 20% of net income with a max of $36K ($54K total). Remember net income takes out business expenses and some other things, so it it less (sometimes a lot less) than your gross income.

Like many things with self-employment, you're more on your own for solo 401(k)s. If you expect $100K and (depending on your org type and some other factors) dump the max employer portion in early and then don't actually hit the $100K, you'll have to go through paperwork to essentially pull out the difference. It can be a PITA because of the paperwork and it also can complicate your taxes.

Keep in mind any contributions that have been made to your employer's 401k that year -- both individual contributions and any employer match. Those reduce your solo 401(k) maxes. IOW, the $18K individual contribution max is across ALL 401(k)s and same with the employer contribution limit.

If you are married and your spouse contributes to the business, he/she can also get in on your solo 401(k) for a whopping $108K tax deferred if you have high enough income.

What I do is track my YTD net income and subtract out a little buffer. First I fill up each of the two (me + spouse) $18K employee buckets first. Then I start tracking net income minus the buffer and minus the $36K. I periodically do employer contributions to 20% of that, filling my $36K bucket first then my partner's. So, like you said, I only contribute up to what I've actually made, I don't front-load it all in anticipation of expected income.

That also helps avoid any draw to try to time the market via timing contributions. I use Vanguard and it's free and easy, although I believe admiral shares and their slightly lower management fees are not available.

As someone else pointed out, once plan total exceeds $250K, you have to file form 5500 annually.

Unless you expect to have higher income in retirement, or tax rates to be substantially higher in retirement, you are probably better off doing a traditional tax-deferred 401(k) first, then maybe a ROTH IRA second. Keep in mind that Roth 401(k)s don't have many of the benefits of Roth IRAs. For example, Roth 401(k)s have RMDs unlike Roth IRA.
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Old 08-18-2017, 08:41 AM   #7
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I have a solo 401(k) held at TDAmeritrade. I have both a traditional and Roth 401(k) with them. I have seen on the internet that many people think these things cost money. The reality is that the total fees should be $0.00 just like an IRA or any other brokerage account. One should also not have to pay any commissions to buy the investments that one wants to own.

I have to file Form 5500, but it is easy and free to do so online, but don't miss the deadline if you are required to file this form.

BTW, while a Roth 401(k) has RMDs, everybody would roll their Roth 401(k) over to a Roth IRA before the time comes in order to avoid any unwanted RMDs. Thus it is a total non-issue.
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Old 08-20-2017, 08:28 PM   #8
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Thanks for this folks, will help me shape my 2018 strategy.
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