Individual 401K Advice

[kannon]

Morning -

Oldest son is self employed, receives numerous 1099s. He has his own Roth IRA that he maxes out. Looking for other opportunities to save for retirement.

I suggested look into an Individual 401K from Vanguard. Anyone doing this?

My main questions are:
1) can he have an Individual 401K AND a Roth IRA?
2) what are the limits? % of net profit or hard number like employer 401k plans?
3) when can he contribute? Is 31 Dec the end for contributing to a 2018 individual 401k?
4) How? Vanguard is what we use now. They have a 102 page Individual 401K guide. Yikes!!
5) any words of wisdom??

Many thanks
Kannon

 

[bada bing]

I have had a solo401K at Schwab for 5 years now. It is for my sideline sole-prop gig. I also have a W2 job with mega-corp and a 401K with them. I use all of my individual qualified contribution limit ($18.5K + $6K catch-up) in my mega-corp employee 401K. I put a small amount of profit sharing ($2K/yr) into my solo401K. The primary purpose of my solo401K is to hold the rolled in money from my tIRA to facilitate backdoor Roth contributions.

I recommend you evaluate custodians. I'm not the biggest Vanguard fan as far as account custodian, but there are significant reasons to consider a different custodian for a solo401K. Vanguard's solo401K plan doesn't accept any roll-in money, which is a fairly big shortcoming for a lot of people.

1) can he have an Individual 401K AND a Roth IRA?
Yes, but there are income limits on direct Roth contributions. The backdoor Roth works for anyone with earnings, provided you work around pro-rata rules for tIRA balances. You begin to lose direct Roth contribution limits at $120K individual and $189K MFJ in 2018
2) what are the limits? % of net profit or hard number like employer 401k plans?
The "employee" qualified limits are the same as any 401K - $18.5K + $6K catch-up in 2018. The profit sharing limit for "employer contributions" is 25% of profit for incorporated businesses and 20% for sole-prop. Note that the employee contribution limit is global, you have one limit for all 401K plans you participate in.
3) when can he contribute? Is 31 Dec the end for contributing to a 2018 individual 401k?
The account has to be set up by Dec 31. It is a multi-day process to open an account and it is getting late to open one for 2018.
4) How? Vanguard is what we use now. They have a 102 page Individual 401K guide. Yikes!!
Yes, a solo401K is more involved than an IRA, but isn't prohibitively complex. The complexity is another reason I would look at different custodians. Vanguard doesn't treat solo401K as a core business and you'll want a little hand holding.
5) any words of wisdom??
I'd steer you towards Schwab. They appear to have solo401Ks as more of a core business, their plan template is better and they have a dedicated team of CSR's for business retirement plans. I have read that Fidelity is also good for solo401K, but no personal experience. A solo401K plan isn't a big deal, but the set up and paperwork is definitely more involved that an IRA.

 

[RockyMtn]

I've used Schwab for a solo 401k that I have for a LLC. Works fine. Bada Bing's answers are spot on.

Only thing I would add is that after you have established the 401k you have till April 15 of the following year (or in the case where you filed an extension to October 15) to fund the previous year's contribution.

 

[Sunset]

Morning -

Oldest son is self employed, receives numerous 1099s. He has his own Roth IRA that he maxes out. Looking for other opportunities to save for retirement.

I suggested look into an Individual 401K from Vanguard. Anyone doing this?

My main questions are:
1) can he have an Individual 401K AND a Roth IRA?
2) what are the limits? % of net profit or hard number like employer 401k plans?
3) when can he contribute? Is 31 Dec the end for contributing to a 2018 individual 401k?
4) How? Vanguard is what we use now. They have a 102 page Individual 401K guide. Yikes!!
5) any words of wisdom??

Many thanks
Kannon

I have been doing it for a few years.

1) Yes, he can have both an solo 401K with both an IRA AND ROTH in the 401K, plus his individual IRA and Roth. A total of 4 types of accounts.

2) When he has a solo 401K there are 2 views to it, he will be both employer and employee, the employee limits are same as any regular Joe at a company. The employer limits are about 25% of Net income (after expenses) to a limit of $55,000. Yes the amounts can be that high !! Great way to save. (edit: employer side can only contribute to 401K IRA part, not the 401K roth side).
https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k

3) It needs to be set up before the end of the year to be valid - time is short so get on it right away. There are no fees except $20 per mutual fund account you actually use, and maybe this went away I don't really pay attention as it's so cheap. Once set up, he has to April to contribute both sides (employer & employee) can be a lump sum.

4) See link I posted, phone them, they are very willing to help, he will need to get an EIN (SSN for the plan) , they can tell you how, it's easy to do and all online.
Paperwork will need to be mailed, which is why it needs to be started quickly to make the end of the year setup deadline if you want it for 2018.

5) Wish I had found this earlier... Can set it up as 401K regular, and add the Roth side to it later on by phoning Vanguard. That is what I did as I didn't know about the Roth side.

 

[LOL!]

Bogleheads.org has many threads about individual 401(k)s, so I think it is a good place to search the subject.

I have an individual 401(k) for many years now. There are several vendors to choose from and information on the web seems outdated for most of them, so that's not going to make it easy to choose.

My account is with TDAmeritrade. I chose them because
1. Local office lets me do last minute things quickly in person.

2. No commission ETFs and no other fees to set one up, but this goes for pretty much all vendors nowadays.

3. I had accounts at TDAmeritrade already, but I have accounts at 4 or 5 other places, too.

4. I have traditional and Roth 401(k)s.

5. The account opening is rather quick if you don't bother to understand the 75+ page boilerplate 401(k) legal document which is impossible to understand anyways.

6. TDAmeritrade has a loan option, but in retrospect no one knows how to actually use or implement it, so I don't think it is an issue.

Some people want to roll old IRAs into their solo 401(k) and some solo 401(k) do not allow that. It was not an issue for me since I was converting all my old traditional IRAs to Roth IRA anyways. Some people didn't like that Vanguard did not allow admiral class fund in their solo 401(k), but since they seem to be getting rid of Investor-class funds anyways, I think the lower-expense ratio admiral funds are now available.

I have to fill out Form 5500-SF myself each year to report the value of my i401(k) because it has over $250,000 in assets. This is easy to do online with a US government web site, the 401(k) custodian will not help you do it. Don't forget to do this if account value is over a quarter million dollars because the penalties are exceptionally severe.

Finally, one will get an EIN online to use for the business and/or 401(k) if they don't have one already as well. Takes about 5 minutes and is easy to do.

 

[Animorph]

Both Individual 401k and Roth 401k worked great for me. I used E*Trade, mainly to get the Roth option at the time I was opening them. Rolled over to an IRA a couple years ago.

 

[kannon]

Thanks for everyone's reply, things are solidifying. Like to share some more information.

He currently is a 50-50 partner in a LLC that does not have any retirement plan. Truth be said it's a struggling non profit that does good work but is not pulling in a large income.

He also does many odd jobs - paid via 1099-Misc - doing task rabbit, Uber, grant proposal writing, book reviews,...

His 1099-Misc earned income could support a max $18K 401K contribution.

I have a vanguard application ready for him that only needs to add an EIN. He has an EIN for his LLC but I think he needs his own EIN for his "self-employed" 1099-Misc income.

Appreciate anyone's thoughts - are what we doing ok with the IRS? does he need a new EIN? Are we missing something?

Thank you

 

[MissMolly]

If you are planning to open this Individual 401K for 2018 you are too late. It has to be done by 12/31/18 and there is no way to get that accomplished at this point.

 

[Sunset]

Check with Vanguard, BUT I believe he is too late for the self 401K this year. See my post #4 above.
There is a slim chance you could fax it to Vanguard (After talking to a rep) on Monday morning.

Yes the 401K needs an EIN.
You do it online at IRS.
https://www.irs.gov/businesses/smal...-an-employer-identification-number-ein-online

Unfortunately it looks like it is closed until the new year. So that also probably means you cannot set up the solo-401K until 2019, which means for the 2018 tax year nothing can be contributed to it.
Check with Vanguard, but that is how it was a few years ago.

Cross-posted with Miss Molly...

 

[kannon]

It would be for 2019. Understand we are too late.

At this point I just want to make sure everything we are trying to do makes sense, not breaking any IRS regulations.

Thanks

 

[kannon]

Well - we were able to start a solo 401K account in Vanguard for his 2019 1099 Misc self employment income. That worked out fine.

Had a hiccup today. He got a job offer to work as a govt contractor. He says he will be getting a W-2. His 1099 Misc self employment days look like they are over. The problem is that the contractor position has no medical insurance, no retirement plans (i.e., 401k)

He has and still does a lot of finance work for our family - tax returns for the family and spreadsheets/databases development and bookkeeping for our volunteer efforts. He has always just done things for us for free. Can I pay him in the form of a 1099-Misc for his services and then he could use that as a means of a solo 401K income stream?

Thanks

 

[spncity]

Good news about Solo 401k. Seems one can open anytime.