Fidelity Solo 401K
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Yes, it's a SEP-IRA. Fidelity has a worksheet that tells you how much you can contribute each year when doing your taxes, as it's based on your earnings.
USGrant1962
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Solo 401(k) and SEP IRA are not the same thing. Generally, Solo 401(k) is better with higher contribution limits and availability of Roth accounts.
EDIT - oh, and you should definitely do it. There is no downside and nothing forces you to contribute. Set up both regular and Roth accounts and use them to tweak your taxes.
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MissMolly
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But if you want to contribute for 2020 the account has to be set up by no later than 12/31/2020. Contributions can be delayed until 04/15/2021.
RockyMtn
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Started with a SEP then moved to a Solo 401k as you can contribute significantly more $$$'s. Bit more reporting involved once you hit about $250k but nothing you shouldn't be able to handle. Started mine with Schwab then moved it to Fidelity when I consolidated all of my retirement accounts there.
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Oh, right. Ours is a SEP as DH and I are both on the business. We do have traditional IRA's as well. But for sure, fidelity can help you set up these quite easily and walk you through your choices.
About how much income will you receive from the business? That can make a difference in terms of what options you may want to have in your 401k. The main consideration is whether you want to be able to make mega backdoor Roth contributions now or in the future Also, some plans allow rollovers of existing IRAs and some do not.
Solo/Individual 401(k) is a nice option. I believe it generally gives you the most pre-tax savings ability except in a few specific circumstances. You basically get the standard individual 401(k) contribution of $19.5K, plus the business can contribute up to (generally) 20% of net income, up to the total IRS max of $57K ($58K 2021).
The solo 401(k) can be nice if you have a spouse who also contributes to the business, as he/she can also do the $19.K + $37.5K, although you'll need business net income in the $350-400K/yr range to hit that double max.
As someone else pointed out, there is minimal paperwork until you get to total plan assets of $250K, then a bit more with a form 5500 required to be filled out annually. Also, I believe, some of that information is technically public.
The solo 401(k) can be nice if you have a spouse who also contributes to the business, as he/she can also do the $19.K + $37.5K, although you'll need business net income in the $350-400K/yr range to hit that double max.
As someone else pointed out, there is minimal paperwork until you get to total plan assets of $250K, then a bit more with a form 5500 required to be filled out annually. Also, I believe, some of that information is technically public.
You are in the business income window where you should consider making megabackdoor Roth 401kcontributions. This topic is a bit complex but will be worth your familiarizing yourself with. A few points:
-The term "mega backdoor Roth" is terminology not found in IRS publications but usually and in this reply refers to an after-tax contribution to a 401k followed by an in service Roth distribution/rollover (referring to the fact you are making the Roth distribution/rollover before plan termination). It is not the same as a backdoor Roth or Roth conversion.
-Therefore, to make a MBR contribution, your 401k plan documents must permit after-tax contributions and in service Roth distributions. None of the prototype free plans offered by the major brokerages like Fidelity, Schwab, Etrade permit these and therefore these plans cannot be used to mechanize a MBR contribution. Custom 401k plans from providers like Employee Fiduciary may allow MBR. 401k plans from mysolo401k and other discount 401k providers may also allow MBR although those providers do not act as 401k administrators in the same way a provider like Employer Fiduciary does.
-The tax implications of a MBR to an individual are different depending on whether it is being made in lieu of, versus in addition to, one's maximum allowed pretax (including both employee deferral and employee profit sharing) contributions. Making MBR contributions in lieu of pre-tax contributions is effectively the same as favoring Roth contributions rather than pretax contributions and generally not recommended during your earning years. In contrast, making MBR contributions in addition to maximum allowed pre-tax contributions is effectively converting regular non tax advantaged funds to Roth funds and therefore is a "no brainer", i.e. has no downside, and IMO should be done to the maximum extent you have the available funds.
-Within certain business income ranges, there is space to make after tax contributions above and beyond maximum pretax contributions. Generally speaking, for 2021 this will be in the net businesss income range between $19,500 and $200,000. Therefore if your net business income is within this range, I recommend you open a solo 401K that can be used to mechanize MBR contributions. After maximizing your pre-tax 401k contributions, you should make the maximum MBR contribution that your business income allows.
-There are fees involved for opening and maintaining a 401k plan that enables MBR, which is a disadvantage compared to using a free prototype plan offered by a major brokerage like Fidelity, but in my opinion the fees in your case are probably worth the opportunity to make MBR contributions. At least in the beginning, I suggest you use a provider that assumes the responsibility for plan administration, such as Employee Fiduciary, as opposed to a discount 401K provider. Retirement plan compliance errors can be costly and difficult to unwind.
I am not a professional in this area. You should do your own diligence and consult with appropriate retirement plan and tax professionals. Good luck!
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Lots of good info here. Another reason to do a solo 401k depending on your age would be the ability to roll in your IRAs and do your own separation of service at or after 55. https://www.irs.gov/taxtopics/tc558
I think your advice makes a lot of assumptions about OP, especially about tax rates now versus in retirement.
Generally, most of us on this forum LBYM, which usually points toward a lower -- oftentimes a lot lower -- tax rate in retirement than during the earning years. In that case, wouldn't one want to make whatever contribution is maximally possible (and it would be the same regardless of deferred vs Roth split) tax deferred? If you are arguing a mega backdoor Roth allows contributions past the $57.5K: how? It also gets more complicated, I believe, if you have other T-IRAs, when you go to split the contributions versus earnings.
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Your response indicates you did not understand at all what I wrote, or the utility of the MBR in certain income ranges.
-I agree the maximum tax deferred contribution should generally be made in one's earning years, and I took pains to write that.
-The MBR contribution limit including MBR in 2020 is $57,000 for those under age 50, not more than that. The point I made and that you are missing is that, in a certain income range, after tax contributions can be made in addition to the maximum tax deferred contributions, but still subject to the $57,000 limit. This is because the after-tax contribution limit is by net business income. This is in contrast to the 20% of net business income limit that employer profit sharing tax deferred contributions are subject to. Both are subject to the overall $57k limit.
For example, for net business income $60,000 the maximum employee deferral in 2020 would be $19,500. The maximum employer profit sharing contribution would be $15,000. Total tax deferred contributions are therefore $34,500. If the 401k plan allows MBR, in addition to these tax deferred contributions, an after-tax contribution of $22,500 could be made (to bring total contributions up to $57,000) and rolled over to a Roth 401k or Roth IRA account. This after-tax contribution and rollover has the net effect of converting $22,500 of regular investment account funds to Roth, with no more tax paid than the default case of not making any MBR contribution. Obviously this is a gift horse of great value. All this of course assumes one has the funds to make these contributions.
All of this is a bit complicated and is frequently misunderstood, but is not all exotic and is widely written about and discussed. A google search for megabackdoor roth contribution or a look at the whitecoatinvestor site or any of the discount 401k company sites will explain all this in detail. Bogleheads also has many threads on this.
Here are some sites where this is explained:
https://www.nerdwallet.com/article/investing/mega-backdoor-roths-work
https://www.mysolo401k.net/solo-401k/mega-back-door-roth-using-solo-401k-plan/
https://www.irafinancialgroup.com/l...an participant would then,funds to a Roth IRA.
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This is the critical thing (italicized) that I was unaware of. I thought the limit was 20/25% regardless of pre or post tax. I had read the NerdWallet link previously and, unless I'm missing it, it does not explicitly discuss contribution limits or separate pre and post tax limitations beyond the $57K total. Does this different income limit apply only to the non-prototype plans? Simply put, could a Fidelity prototype solo 401(K) holder make their 20/25% pre-tax limit, then make a solo roth 401(k) contribution up to the lesser of their remaining net business income or $57K total?
A nitpick question: doesn't the $19,500 reduce the maximum profit sharing below $15K?
And finally, the MySolo401K.net link you provided, under Impact of Voluntary After-Tax Solo 401k Contributions by Day Job Contributions, it says the $57K 415c limit is on a per employer basis. Is that correct? Does that mean if one person works a W2 day job (assuming MBR is available and income is high) and has self-employed income, he/she could be putting $114K/year into his/her 401(k)s? Even more if one had, say, W2 plus two separate companies?
Thanks for explaining this more clearly.
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Someguy, I'm continually surprised by a layer in this topic I was not aware of, so take everything I say with a grain of salt. I'll do my best to answer your questions.
The 415(c) limits are general plan limits as established by law. However, a specific 401k plan may effectively be more restrictive by not allowing certain contributions at all. For example the Fidelity prototype plan may not allow aftertax contributions (and I don't think it does). In that case, the limit of all contributions in such a plan is no higher than the sum of the income-eligible tax deferred contributions.
My understanding is that the employer profit sharing contribution is based on wages plus employee deferrals. Therefore, employee deferral contributions do not reduce the maximum employer profit sharing contribution.
Regarding participating in multiple 401k plans my understanding is the 415(c) limit is per plan. However, before business owners get too creative, the plans may not be affiliated entities. Also, the total employee deferral limit is combined across plans. To the extent one's employee deferral is limited, however, one can make it up with employer contributions up to the 415(c) limit per plan.
I'd like to address something you said earlier about generally maximizing tax deferred contributions in earning years. Since the 199A deduction has come into play, it adds an interesting wrinkle to this. 401(k) tax deferred contributions reduce QBI and therefore the 199A deduction, whereas aftertax contributions do not reduce QBI. If one is below phase-out threshold for QBI deduction, in effect one therefore gets a "discount" on aftertax contributions to the extent they reduce tax deferred contributions. For example, if one is in a marginal federal income tax bracket of 24%, the real cost of an aftertax contribution made in lieu of, rather than in addition to, a pretax contribution may only be around 19%. So it may actually be reasonable under such circumstances to consider prioritizing Roth contributions over tax deferred contributions within a 401k plan. It basically moves the needle a bit. In fact, this year I am going to reduce my tax deferred 401k contributions and make up the difference with additional aftertax contributions, as I believe with the added effect of the QBI deduction, I'm likely to pay less tax now than once RMD's begin. I may be wrong, of course.
Disclaimer-I'm not attempting here to provide a definitive explanation of the MBR. I am not an expert and the topic is nuanced and whether it is appropriate for any person depends on many moving parts. My intent primarily is to make the point that if one has a sole proprietor business, or if your employer allows aftertax 401k contributions with in service distributions, and your tax deferred 401k contribution limits are below the overall 415(c) limits, the MBR is highly likely to be a very advantageous tax strategy for you and you should look into it with your human resources department if you are an employee, or by researching online and contacting a professional such as Employee Fiduciary if you have your own business. Another point I would like to emphasize is that all solo 401(k) plans are not equal by any means and so one should try to evaluate at the outset what features may be useful to you, such as the ability to make MBR, rollovers of IRA's, loans, and distribution rules. This may avert the need to transfer your 401(k) to a different plan provider in the future.
Final observation-accountants may or may not have the expertise in this to advise you optimally. I have yet to speak to an accountant with a working knowledge of the practicalities of the MBR for a sole proprietership.
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Souschef
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I was seduced into the thought that I would be in a lower tax bracket after I retired. Unfortunately, I was not an early retiree. I retired at age 69, and a few years later, with RMD's and 85% tax of our SS benefits, I was in the 22% bracket.
Not the case for you, I assume, but lower tax brackets in retirement are in particular frequently a false promise for those not filing MFJ.
bada bing
Full time employment: Posting here.
You're on short time to get a plan adopted before Dec 31 for the current year. It takes several days at minimum to open an account. I don't think you'll make it for tax year 2020 unless it is already in progress.
As a small sole proprietor, you most likely will be going with a brokerage template plan ? If so, I found Schwab to be the best custodian for solo401K. I have accounts with Fidelity and am very happy with them, but for solo401k in particular, I found Schwab to be more focused on the small business retirement plan niche.
As mentioned above, there are potential advantages to crafting your own plan documents, but I found the complexity and potential for screw ups too much. I was concurrently in my mega-corp employer's 401K, which gave me access to mega-backdoor contributions. I opened a Schwab template plan for my sole-prop side biz and have been well served by it for 10 years now. Using Schwab's plan is easy, especially with a balance under the $250K annual reporting limit. The only hassle is the paperwork to get the plan adopted, which isn't too bad.
As a small sole proprietor, you most likely will be going with a brokerage template plan ? If so, I found Schwab to be the best custodian for solo401K. I have accounts with Fidelity and am very happy with them, but for solo401k in particular, I found Schwab to be more focused on the small business retirement plan niche.
As mentioned above, there are potential advantages to crafting your own plan documents, but I found the complexity and potential for screw ups too much. I was concurrently in my mega-corp employer's 401K, which gave me access to mega-backdoor contributions. I opened a Schwab template plan for my sole-prop side biz and have been well served by it for 10 years now. Using Schwab's plan is easy, especially with a balance under the $250K annual reporting limit. The only hassle is the paperwork to get the plan adopted, which isn't too bad.
Were you planning to be an early retiree? What was your marginal bracket during your prime earning years? Are you now "forced" to withdraw more than your budget/needed amount?
One should always run the numbers for your own situation. In my own situation, short of tax policy changes which I couldn't control anyway, if my retirement time tax rates are anywhere near my prime earning tax rates, that will mean I have more than won the game. Also, if one is near or at the top marginal rates during prime earning, retirement taxes could only be the same or lower (again, excluding major tax policy changes).
Amen to that!
Fidelity may have been a bad example. I know other prototype plans from the majors allow after-tax contributions, ie to a Solo Roth 401(k) (because I have one). So what about then? Assuming your example again -- $60K net -- could that person contribute the standard $19.5K pre-tax and then $37K post-tax (ie, to Roth 401(k))? I'm trying to understand how that post-tax contribution would be different than the multi-step process outlined in your links?
Yes. It's complex -- as you pointed out RMDs later factor in. Although your pre vs post tax savings ratio impacts this directly, plus your timing and the possibility of Roth conversion ladders between ER and RMDs (which is of course also dependent on your post tax savings).
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This is my speculation but I think if the prototype plan allows after-tax contributions but not in service distributions the aftertax contribution could be made, but it could not be rolled over to a Roth account while in service. The gains on the after-tax contribution would be subject to income tax when distributed (but the principal would not). It would be like making an after-tax contribution to an IRA. The administrator would have to track the after-tax basis in the account.
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