Author Topic: Is setting up a Solo 401k as easy as say an IRA account?  (Read 1794 times)

JenniferW

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Is setting up a Solo 401k as easy as say an IRA account?
« on: September 01, 2018, 03:37:09 AM »
I instantly setup a Roth IRA account the other day, for the first time,  for my sole proprietorship.  I transferred in $10 so far.  I plan on transferring in $5490 more to max it out for the year. However..

My self employment brings in about $8000 a year, should I setup a solo 401k instead so I can put $8000 in per year?   I'll be investing $15-20k per year between the retirement account and non-tax-advantaged brokerage accounts -- a savings rate of 50% per month or so.  All of my other income (SSDI) is unearned and can't be put into retirement account, so I would really like to put every penny of my Net Profit for the year of self employment into retirement.

Is a solo 401k as easy to setup as a Roth IRA?  I literally set up the Roth IRA in a few minutes on Vanguard.  Does it cost anything to set it up?  Do I need a professional to do it?

I'm 47 and waited too long .. should of known all about this a couple decades back.  So I am aggressive with my saving.  Need to get maximum into tax advantaged retirement account.
« Last Edit: September 01, 2018, 03:42:31 AM by JenniferW »

ixtap

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #1 on: September 01, 2018, 03:57:27 AM »
It is not easy, at least with Vanguard. You have to get an EIN, even if you generally file under your SS (easy to do, though). You have to mail in a ream of paperwork, half to set up the plan and half to set up your individual account. But they don't actually want it filled out according to the instructions. They have a box to check to make the beneficiary your spouse, but they wouldn't process the file with that box chcecked, I had redo the beneficiary section first. I believe there was another issue as well, but it has been awhile.

Pretty much the only thing you can do online is make contributions, address changes and require a phone call or mailed paperwork.

However, it is free and you do not need a lawyer. It is just a bit tedious. Just it going well before the end of the year to ensure that it is set up by December 31.

bacchi

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #2 on: September 01, 2018, 07:54:07 AM »
If you make $8000 as a sole proprietor, you can't put $5500 into a Roth and $8000 into a solo 401k.

Or do you also have a regular W2 job?


No worries about missing out on the solo 401k decades ago. It's fairly new.

Paul der Krake

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #3 on: September 01, 2018, 08:04:06 AM »
The hardest part is coming up with a cheeky plan name.

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #4 on: September 01, 2018, 01:54:33 PM »
Thanks for the replies.  Bacchi, I only make $8000 earned income (from self employment) no w2 work.  The rest of my income is from Social Security Disability Insurance.  As is I was just going to contribute $5500 per year of that $8000 business net income into a Roth IRA. Was wanting the rest of it (i.e. $2500 more) into retirement account if possible.  That's why I was wanting to know about solo 401k instead of using Roth.

tralfamadorian

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #5 on: September 01, 2018, 02:45:15 PM »
I set mine up with Fidelity in a couple hours including when I had to call them with a couple of questions. They answered right away and were very helpful on the phone. I also have to mail in my contribution checks, which feels a bit byzantine but the ability to sock away all the extra pre-tax is more than worth it for me.

+1 @bacchi comments regarding contribution limits.

channant

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #6 on: September 02, 2018, 08:21:11 AM »
I just did this about 3 weeks ago and all I did was give Vanguard a call and they made it super easy. A representative walked me through the entire process on the phone. It took about 45 minutes and there was a lot of (digital) paperwork, but he explained every single page I had to fill out. Check out the link below for more info and there's a number to call in the sidebar.

https://investor.vanguard.com/what-we-offer/small-business/individual-401k

jacoavluha

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #7 on: September 02, 2018, 09:45:08 AM »
an IRA is an individual retirement account.
a solo 401k is an employer sponsored retirement account
they really have nothing to do with one another. You can have both.

you can contribute to an IRA if you have earned income. It seems that you do. There are annual contribution limits depending on age, and whether you can deduct a traditional IRA contribution, or contribute directly to a Roth IRA, depends on your income level.

as a sole proprietor, you are employer and employee. You can establish a solo 401k. Money can get into the solo 401k from the employee (salary deferral) and/or the employer (profit sharing). You could do either or both. Again, there are limits. A solo 401k plan is more complex than an IRA and you can create a mess if you don't understand what you're doing. You want to be careful to never over-contribute.

With $8000 of sole proprietorship income you could contribute almost all of this as elective employee salary deferral to a solo 401k. But then, because you've deferred your salary, you no longer have earned income. So, you could not contribute to an IRA.

Alternatively, you could make a lesser elective salary deferral to the solo 401k. Then, you would still have some earned income, and could contribute to an IRA. And because there is still business profit, you could also make an employer profit sharing contribution to the solo 401k. There is interplay between all these numbers and it would take some work to figure out what is best in your personal situation.

The point is, you should probably not do anything until you have a good understanding of what you're doing. Certainly this is the case with a solo 401k.

What is your adjusted gross income? What is your marginal tax rate?

jacoavluha

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #8 on: September 02, 2018, 09:52:58 AM »
you might find this calculator helpful in determining how much you can contribute to a solo 401k based on your income

https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a

Note you have to change the inputs at the top of the spreadsheet to updated numbers for the social security wage limit, salary deferral limits, etc.

DavidAnnArbor

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #9 on: September 02, 2018, 10:41:36 AM »
Yes do the solo 401k but open it up with Fidelity instead, the equity index mutual funds have lower expense ratios

nonsequitur

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #10 on: September 02, 2018, 09:32:17 PM »
As others have mentioned, it is definitely not as easy, but it is doable.  When I did this years ago, Vanguard did not offer a Roth Solo 401k option, but Fidelity did.  You may want to consider that. 

MrsWhipple

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #11 on: September 02, 2018, 09:40:01 PM »
Why not set up a SEP/SIMPLE IRA instead? It's easier than a solo 401k and I should think you'd be under the contribution limits. Have things changed since I was looking at these?

I set up a solo 401k but it was really only worth it when the business was making a LOT more money.

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #12 on: September 02, 2018, 10:16:38 PM »
If you make $8000 as a sole proprietor, you can't put $5500 into a Roth and $8000 into a solo 401k.
Correct.  But you could put $8000 into a solo Roth 401k, and $5500 into a Roth IRA.  Whether that is a good idea is another question, but you could....

bacchi

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #13 on: September 03, 2018, 08:05:37 AM »
If you make $8000 as a sole proprietor, you can't put $5500 into a Roth and $8000 into a solo 401k.
Correct.  But you could put $8000 into a solo Roth 401k, and $5500 into a Roth IRA.  Whether that is a good idea is another question, but you could....

I don't understand. You're suggesting that $13500 total could be put into a solo Roth + a rIRA even though earned income is only $8000? How does that work? Both plans require earned income.

Holy shit. That's a neat trick.

For others: Because the Roth 401k doesn't reduce the earned income line, there's still enough earned income to put into a rIRA.
« Last Edit: September 03, 2018, 08:11:09 AM by bacchi »

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #14 on: September 03, 2018, 01:47:05 PM »
Using the above trick, I seriously can put $13,500 into retirement account(s) when my only earned income is from self employment at $8000 net profit for the year?

My current yearly income: $8000 self employment (earned) and about $27,000 SSDI income (unearned).

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #15 on: September 03, 2018, 01:59:26 PM »
Using the above trick, I seriously can put $13,500 into retirement account(s) when my only earned income is from self employment at $8000 net profit for the year?

My current yearly income: $8000 self employment (earned) and about $27,000 SSDI income (unearned).
Yes.

If that is your only income, you will pay $0 federal income tax this year.  Thus Roth is your better choice anyway, and being able to "double dip" is just an added bonus.

Neither SEP nor SIMPLE plans can be Roth, so the solo 401(k) plan is your vehicle of choice.

MrsWhipple

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #16 on: September 03, 2018, 02:19:31 PM »
Neither SEP nor SIMPLE plans can be Roth, so the solo 401(k) plan is your vehicle of choice.
Oh, that is good to know! Another tidbit is that solo 401ks can sometimes be used to invest in other, weirder things like real estate. Vanguard, so far as I know, does NOT allow that, which is why I'm considering moving my solo 401k to Fidelity or something else. Do you have a recommendation?

bacchi

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #17 on: September 03, 2018, 02:22:48 PM »
Note: Fidelity doesn't offer a solo Roth 401k option.

jacoavluha

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #18 on: September 03, 2018, 02:39:22 PM »
with $8,000 your actual compensation, and maximum employee elective deferral pretax or Roth to solo 401k, is actually $7,435 because you have to reduce business profit by the deductible portion (1/2) of self employment tax

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #19 on: September 03, 2018, 02:52:52 PM »
Using the above trick, I seriously can put $13,500 into retirement account(s) when my only earned income is from self employment at $8000 net profit for the year?

My current yearly income: $8000 self employment (earned) and about $27,000 SSDI income (unearned).
Yes.

If that is your only income, you will pay $0 federal income tax this year.  Thus Roth is your better choice anyway, and being able to "double dip" is just an added bonus.

Neither SEP nor SIMPLE plans can be Roth, so the solo 401(k) plan is your vehicle of choice.

Yeah I know Roth is best for sure given my current circumstances.   I just can't believe I can invest $13,500 in retirement account with only $8000 earned income.  i.e. take $5500 of that SSDI money and put in retirement account.. I have read no SSDI income can be put into retirement account.

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #20 on: September 03, 2018, 03:21:23 PM »
Yeah I know Roth is best for sure given my current circumstances.   I just can't believe I can invest $13,500 in retirement account with only $8000 earned income.  i.e. take $5500 of that SSDI money and put in retirement account.. I have read no SSDI income can be put into retirement account.
It's correct that SSDI income may not be used to demonstrate eligibility for a retirement account.  But there is no "tracking device" on the SSDI income that follows it from the SSDI check to your bank account to your check to the IRA provider and prevents that last check from being used.  See What Is Compensation?.

As jacoavluha noted, when you get down to the nitty-gritty it won't be the full $8K that can go into the Roth 401k, but your MAGI will still be high enough to justify $5500 to a Roth IRA.

There may also be the possibility of employer contributions to your solo 401k.  These would have to go to the pre-tax portion of the 401k, but you could then convert them to the Roth 401k, paying whatever tax (likely $0 federal) is due.  See One Participant 401k Plans | Internal Revenue Service, and perhaps talk with prospective solo 401k providers to ensure your plan will allow this.  As bacchi noted, Fidelity doesn't support solo Roth 401k plans at all, and I believe neither does Schwab.

See also How to implement Mega Backdoor Roth with Solo 401K? - Bogleheads.org.  This is not exactly what you would be doing, but some parts might be relevant.

jacoavluha

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #21 on: September 03, 2018, 03:31:34 PM »
there really is no point in making employer profit sharing contributions in this case. Employer contributions are always pretax. And I'm unaware of any provision for in-plan Roth conversion of employer contributions. It matters not anyway. If the OP is not paying income tax, then there is no tax savings by making pretax contributions. Additionally, profit sharing contributions reduce compensation and therefore reduce the amount eligible for elective salary deferral (Roth most likely in the case of the OP).

IF there was business profit above the $18,500 limit of salary deferral then profit sharing contributions may make sense.

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #22 on: September 03, 2018, 03:34:57 PM »
...profit sharing contributions reduce compensation and therefore reduce the amount eligible for elective salary deferral.
That's the key point of which I wasn't familiar - thanks.

DavidAnnArbor

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #23 on: September 03, 2018, 09:08:53 PM »
there really is no point in making employer profit sharing contributions in this case. Employer contributions are always pretax. And I'm unaware of any provision for in-plan Roth conversion of employer contributions. It matters not anyway. If the OP is not paying income tax, then there is no tax savings by making pretax contributions. Additionally, profit sharing contributions reduce compensation and therefore reduce the amount eligible for elective salary deferral (Roth most likely in the case of the OP).

IF there was business profit above the $18,500 limit of salary deferral then profit sharing contributions may make sense.

There are 3rd party solo 401k plans out there that enable you to do in-plan Roth conversion of employer contributions.  Discountsolo401k is just one such example.

jacoavluha

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #24 on: September 04, 2018, 07:54:15 AM »
Thanks for that education David. I use a similar but different provider for my solo 401k. I need to see if this is possible within my plan.

Of course, for the OP here, there is no need for a semi-custom (not free) solo 401k.

HAPPYINAZ

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #25 on: September 12, 2018, 10:24:19 AM »
As someone here mentioned, since your self employment income is relatively low, a SEP-IRA might work perfectly.  It allows higher contributions than a regular IRA, but isn't as complicated as setting up a solo401k.  I have all three types of accounts for myself (tIRA, SEP-IRA, Solo401K).  My accounts are all with Etrade and it was easy and free to set them all up, but the solo401K was a little more complicated than the others).

dandarc

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #26 on: September 12, 2018, 10:34:21 AM »
eTrade's standard soloK has a Roth Option and the good Schwab funds are no-transaction-fee now. Years ago it was one of only a few that had the Roth option. Ironically, knowing what I know now, "Must have Roth" was a stupid criteria for me, but for others that can be a benefit.

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #27 on: September 14, 2018, 12:22:21 AM »
Seems as though Vanguard has an Individual Roth 401k from what I read on their site.  I am going to call them tomorrow.  Having a problem downloading the sign up kit as when I click that link it takes me to the home page.

So if my net profit is $8000 I will be able to contribute at least $7k with Solo 401k and $5500 with the Roth IRA, despite only earned income being the 8k from self employement.  I still don't understand this.  I wonder who I should talk to who could explain all this to me. Everything seems so complicated.  Yet, I do all my own books and am very good accounting for inventory, cost of goods sold and business expenses.. I know where my net profit stands from transaction to transaction eveyr day.  I just dont' understand this "deferred salary" talk and all that.. sol propritership doesn't have a salary it's "owner's draw" and pass thorugh.

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #28 on: September 14, 2018, 12:34:01 AM »
So if my net profit is $8000 I will be able to contribute at least $7k with Solo 401k and $5500 with the Roth IRA, despite only earned income being the 8k from self employement.  I still don't understand this. 
You might try looking at the solo 401k and the Roth IRA one at a time.

First, study the solo 401k rules until you understand how much you may contribute to a Roth solo 401k, ignoring Roth IRAs.

Then look at what your Form 1040 will have on it, and use those numbers to evaluate how much you can contribute to a Roth IRA, ignoring your Roth 401k.

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #29 on: September 15, 2018, 05:14:47 PM »
From what I am reading about the Individual 401k, is that one's sole proprietorship business can contribute 25% of compensation to 401k, and it is a business expense reducing Net Profit.

So say for example, I didn't have a retirement plan at all setup and my net profit was normally $10000.  I would be charged 15.3% self employment tax on that $10000.

But say if I had this Individual 401k setup, I could then make a $2000 contribution and expense it thereby reducing Net Profit to $8000... and then only paying 15.3% self employment tax on that $8000?  Sounds too good to be true!

Edit: and then use Section 199a to get a 20% deductible on that $8000 net profit?  sweet.
« Last Edit: September 15, 2018, 05:16:32 PM by JenniferW »

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #30 on: September 16, 2018, 05:26:52 AM »
Seems like I can't find a brokerage which has a Solo Roth 401k plan I like.

Vanguard is limited in a few ways with their Solo 401k account compared to Roth IRA.  e.g. you can't trade stocks in it nor purchase ETF.  YOu can only invest in non-admiral share funds.  e.g. their fund for this account comparable to VTSAX / VTI has an expense ratio of around 0.15 compared to 0.04 (about three times more).   Also they charge $20 per fund per year annually if you dont' yet have 50K in their account.

I like Scwaab because they offer commission free Vanguard ETF purchases, but they don't offer the Roth version I need.

The other two which offer Solo ROth 401k, TD Ameritrade & Etrade, are a bit expensive, although they do allow stock trades within that account.

Seems like my best bet I think is to setup a Self Directed Individual Roth 401k plan, where I am the trustee and I get to choose what to invest in.  e.g. I could use Robinhood for stock trades commission free I'd think; I just fund the Robinhood account from the trustee bank account.   I could use Vanguard for commission free low expense ratio ETF & Admimiral Share mutual funds.  I could choose anything I want -- cherry pick the best from all available.

Is this a good idea?  I think Id gladly pay $500-$1000 to have it setup to save on commisions & expense ratios as well as have so much flexibility.   I'd only have to pay once to set it up? Or would I need to pay an annual maintenance fee with the people who set it up for me? Would give me the info I need to administer the plan myself?  Once the trust gets over a certain amount, I realize I have to file an IRS form annually.. just read about that.  Is it much more of a headache than that?  [Another advantage is I could loan myself money if I need it I assume at any interest rate I choose?]
« Last Edit: September 16, 2018, 05:41:32 AM by JenniferW »

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #31 on: September 16, 2018, 10:39:25 AM »
Seems like I can't find a brokerage which has a Solo Roth 401k plan I like.

Vanguard is limited in a few ways with their Solo 401k account compared to Roth IRA.  e.g. you can't trade stocks in it nor purchase ETF.  YOu can only invest in non-admiral share funds.  e.g. their fund for this account comparable to VTSAX / VTI has an expense ratio of around 0.15 compared to 0.04 (about three times more).   Also they charge $20 per fund per year annually if you dont' yet have 50K in their account.
Yes, ~3X.  But on an absolute basis, a 0.11%/yr difference on $50K is all of $55/yr.

HAPPYINAZ

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #32 on: September 17, 2018, 10:10:16 AM »
Seems like I can't find a brokerage which has a Solo Roth 401k plan I like.


The other two which offer Solo ROth 401k, TD Ameritrade & Etrade, are a bit expensive, although they do allow stock trades within that account.



how is Etrade expensive?  There is no charge to set up the acct, and you can buy index funds free of charge.  Perhaps you aren't aware of the many commission free funds they offer?  They have tons of them, including vanguard ETFs.  So quite literally you can open and account, fund it and buy index funds (or other types of funds) without any charges from Etrade.  Expense ratio on the ETFs are really low, 0.03 or 0.04 on several. 

« Last Edit: September 17, 2018, 10:14:59 AM by HAPPYINAZ »

Paul der Krake

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #33 on: September 17, 2018, 10:22:34 AM »
Seems like I can't find a brokerage which has a Solo Roth 401k plan I like.

Vanguard is limited in a few ways with their Solo 401k account compared to Roth IRA.  e.g. you can't trade stocks in it nor purchase ETF.  YOu can only invest in non-admiral share funds.  e.g. their fund for this account comparable to VTSAX / VTI has an expense ratio of around 0.15 compared to 0.04 (about three times more).   Also they charge $20 per fund per year annually if you dont' yet have 50K in their account.
Yes, ~3X.  But on an absolute basis, a 0.11%/yr difference on $50K is all of $55/yr.
Sorry but to keep things in perspective that's like 7 burrito bowls with guac that Jennifer would have to give up on. PER YEAR!

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #34 on: September 17, 2018, 01:08:43 PM »
Seems like I can't find a brokerage which has a Solo Roth 401k plan I like.

Vanguard is limited in a few ways with their Solo 401k account compared to Roth IRA.  e.g. you can't trade stocks in it nor purchase ETF.  YOu can only invest in non-admiral share funds.  e.g. their fund for this account comparable to VTSAX / VTI has an expense ratio of around 0.15 compared to 0.04 (about three times more).   Also they charge $20 per fund per year annually if you dont' yet have 50K in their account.
Yes, ~3X.  But on an absolute basis, a 0.11%/yr difference on $50K is all of $55/yr.
Sorry but to keep things in perspective that's like 7 burrito bowls with guac that Jennifer would have to give up on. PER YEAR!

That's just for $50,000.  What if I have $500,000 in it?  Then it's $550 / yr.  Maint fee, which a law firm charges, for self directed solo 401k is only about $100 per year.   

MDM

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #35 on: September 17, 2018, 02:56:08 PM »
That's just for $50,000.  What if I have $500,000 in it?  Then it's $550 / yr.  Maint fee, which a law firm charges, for self directed solo 401k is only about $100 per year.
Valid point.  If you do reach $500K on $8K/yr contributions before you can roll the Roth 401k into a Roth IRA, that won't be so bad. ;)

At these small differences, your comfort and ease of use with the various providers (assuming they meet your minimum requirements) may be the best way for you to choose.

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #36 on: September 17, 2018, 05:04:24 PM »
That's just for $50,000.  What if I have $500,000 in it?  Then it's $550 / yr.  Maint fee, which a law firm charges, for self directed solo 401k is only about $100 per year.
Valid point.  If you do reach $500K on $8K/yr contributions before you can roll the Roth 401k into a Roth IRA, that won't be so bad. ;)

At these small differences, your comfort and ease of use with the various providers (assuming they meet your minimum requirements) may be the best way for you to choose.

Yeah I forgot there would only be $8k per year contributions into it, even though I am going to be contributing over 20k per year altogether between any accounts I am able.  It'll never reach $500k inside the Vanguard Solo 401k, or at least it is something I could worry about more than a decade from now.. could always roll it into something else at that time.

HAPPYINAZ

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #37 on: September 18, 2018, 12:06:37 PM »
Seems like I can't find a brokerage which has a Solo Roth 401k plan I like.


The other two which offer Solo ROth 401k, TD Ameritrade & Etrade, are a bit expensive, although they do allow stock trades within that account.



how is Etrade expensive?  There is no charge to set up the acct, and you can buy index funds free of charge.  Perhaps you aren't aware of the many commission free funds they offer?  They have tons of them, including vanguard ETFs.  So quite literally you can open and account, fund it and buy index funds (or other types of funds) without any charges from Etrade.  Expense ratio on the ETFs are really low, 0.03 or 0.04 on several.


Not sure if you saw my comment above?  Seems Etrade would meet your needs.  They have a Roth Solo401K and no cost to setup account or to buy a large variety index funds within it. 


JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #38 on: September 18, 2018, 02:05:38 PM »
What is the expense ratio of the etrade fund similiar to VTI/VTOO?

bacchi

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #39 on: September 18, 2018, 03:00:26 PM »
From what I am reading about the Individual 401k, is that one's sole proprietorship business can contribute 25% of compensation to 401k, and it is a business expense reducing Net Profit.

So say for example, I didn't have a retirement plan at all setup and my net profit was normally $10000.  I would be charged 15.3% self employment tax on that $10000.

But say if I had this Individual 401k setup, I could then make a $2000 contribution and expense it thereby reducing Net Profit to $8000... and then only paying 15.3% self employment tax on that $8000?  Sounds too good to be true!

The SE tax has to be paid on all of the earnings, after business expenses*. If your net profit is $10,000, you'll end up paying the SE tax on $10,000. What you put in the solo 401k doesn't change that.

This, incidentally, changes the maximum % you can contribute as profit sharing.

Quote from: https://www.irs.gov/retirement-plans/one-participant-401k-plans
You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

*   one-half of your self-employment tax, and
*   contributions for yourself.



Eta: * SE 401k contributions are not a business expenses unless your S-Corp/C-Corp is contributing, in which case you wouldn't be paying the "self employment" tax.
« Last Edit: September 18, 2018, 03:06:29 PM by bacchi »

dandarc

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #40 on: September 18, 2018, 03:36:09 PM »
What is the expense ratio of the etrade fund similiar to VTI/VTOO?
VTI - one option is SWTSX - 0.03% - currently a no-transaction fee fund.

VOO - one option is SWPPX - 0.03% - currently a no-transaction fee fund.

HAPPYINAZ

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #41 on: September 18, 2018, 04:18:47 PM »
What is the expense ratio of the etrade fund similiar to VTI/VTOO?

I hold VOO in my solo401K in Etrade and the expense ratio is 0.04.  I also hold ITOT, which is similar and slightly cheaper, with expense ratio of 0.03.  I also hold a schwab international fund ETF, which has expense ratio of 0.03.  All of these plus many other ETFs ( including bond funds, index funds, international funds, etc) can be traded commission free on etrade. 

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #42 on: September 18, 2018, 05:05:30 PM »
Wow etrade does indeed sound better than Vanguard solo 401k!  Lower expense ratios on funds, more funds to choose from. No annual fees on balances below $50k.

Also with the ability to trade stocks if one likes. 

Going to look into this more.
« Last Edit: September 18, 2018, 05:08:56 PM by JenniferW »

Telecaster

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #43 on: September 18, 2018, 05:11:29 PM »
Yes do the solo 401k but open it up with Fidelity instead, the equity index mutual funds have lower expense ratios

Unfortunately you can't buy their no fee index funds in a solo 401(k).   

HAPPYINAZ

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #44 on: September 19, 2018, 07:22:22 AM »
Wow etrade does indeed sound better than Vanguard solo 401k!  Lower expense ratios on funds, more funds to choose from. No annual fees on balances below $50k.

Also with the ability to trade stocks if one likes. 

Going to look into this more.

I have been using Etrade for all my stock investing accts (SEP-IRA, tradIRA, solo401K and taxable accts) for 20 years, so if you have anymore questions about Etrade, let me know.  I really like the software platform too, much better than Schwab, in my opinion. 

Etrade also offers some of the more generous signup bonuses which include cash and free trades for individual stocks if you choose to invest that way.  http://www.hustlermoneyblog.com/etrade-brokerage-review/



Paul der Krake

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #45 on: September 19, 2018, 01:32:56 PM »
Yes do the solo 401k but open it up with Fidelity instead, the equity index mutual funds have lower expense ratios

Unfortunately you can't buy their no fee index funds in a solo 401(k).
Are you talking about the new 0% funds that launched with great fanfare recently, or all of their spartan line?

Telecaster

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #46 on: September 19, 2018, 06:01:32 PM »
Yes do the solo 401k but open it up with Fidelity instead, the equity index mutual funds have lower expense ratios

Unfortunately you can't buy their no fee index funds in a solo 401(k).
Are you talking about the new 0% funds that launched with great fanfare recently, or all of their spartan line?

The new 0% funds. 

JenniferW

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #47 on: October 07, 2018, 02:08:20 AM »
with $8,000 your actual compensation, and maximum employee elective deferral pretax or Roth to solo 401k, is actually $7,435 because you have to reduce business profit by the deductible portion (1/2) of self employment tax

First I want to say thanks for pointing this out.

I've been thinking about this more and it makes sense.  With a big company they pay employer side of FICA which is 7.65% and it is a business expense. The idea with self employment calculation is to reduce the net profit of the sole proprietorship by that expense and then only pay self employment taxes on that "salary" portion which is leftover.

Interestingly: however looking at the IRS formula how they do this on the forms was confusing me a bit because it seems to be off by a few dollars.   The "salary" portion is determined by the formula:

salary = net_profit - (0.9235 * net_profit * 0.0765)

So in the case where my net_profit is $8000 this turns out to be the amount you mentioned above: $7434.82.

However, I figure the following is the accurate formula -- and I don't know why the IRS doesn't use it to be honest :

net_profit = 0.0765 * salary + salary
net_profit = 1.0765 * salary
salary = net_profit / 1.0765

In the case of net_profit being $8000, the salary amount is actually: $7431.39 -- $3.43 less than the IRS formula.
« Last Edit: October 07, 2018, 02:29:31 AM by JenniferW »

jacoavluha

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Re: Is setting up a Solo 401k as easy as say an IRA account?
« Reply #48 on: October 07, 2018, 09:53:18 AM »
with $8,000 your actual compensation, and maximum employee elective deferral pretax or Roth to solo 401k, is actually $7,435 because you have to reduce business profit by the deductible portion (1/2) of self employment tax

First I want to say thanks for pointing this out.

I've been thinking about this more and it makes sense.  With a big company they pay employer side of FICA which is 7.65% and it is a business expense. The idea with self employment calculation is to reduce the net profit of the sole proprietorship by that expense and then only pay self employment taxes on that "salary" portion which is leftover.

Interestingly: however looking at the IRS formula how they do this on the forms was confusing me a bit because it seems to be off by a few dollars.   The "salary" portion is determined by the formula:

salary = net_profit - (0.9235 * net_profit * 0.0765)

So in the case where my net_profit is $8000 this turns out to be the amount you mentioned above: $7434.82.

However, I figure the following is the accurate formula -- and I don't know why the IRS doesn't use it to be honest :

net_profit = 0.0765 * salary + salary
net_profit = 1.0765 * salary
salary = net_profit / 1.0765

In the case of net_profit being $8000, the salary amount is actually: $7431.39 -- $3.43 less than the IRS formula.

I'm not sure I follow you. In the case of a sole proprietorship (default self employment "business" structure) it doesn't really make sense to talk about a "salary". It's just "earnings"

Of course you're paying full self employment tax. If you were employed in a W2 position, you pay half those payroll taxes and employer pays the other half.

In the case of self employment then, the IRS allows a tax deduction for one half of the self employment tax. This deduction then reduces net sole prop earnings. And compensation. Because compensation can't be greater than net earnings.

And it makes sense too that you wouldn't get a tax deduction for the one half self employment tax, and then get another tax deduction for the same dollars by putting them into a 401k as employee elective contribution (aka salary deferral).

This spreadsheet may help: https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a