Sole Proprietorship and Individual 401k

[kpd905]

Yep, Bacchi beat me to it-- also remember that to get the Solo 401k open, you'll need to furnish the investment company with proof that the business is actually registered, which can vary dependent on structure, but can be as simple as the fictitious business name filing for a sole proprietor.

Good to know.  So I don't need to be registered as an LLC or anything as a sole proprietor?

[iamlindoro]

Yep, Bacchi beat me to it-- also remember that to get the Solo 401k open, you'll need to furnish the investment company with proof that the business is actually registered, which can vary dependent on structure, but can be as simple as the fictitious business name filing for a sole proprietor.

Good to know.  So I don't need to be registered as an LLC or anything as a sole proprietor?

If the structure of your business is a sole proprietorship, the fictitious business name filing will be adequate proof to open an Individual 401(k).  I you're an S-Corp, LLC, etc. then you'll need whatever paperwork is appropriate for those structures.  Separate from the Individual 401(k), each business will have its own tax requirements, which you should become familiar with, but that's true regardless.

[DavidAnnArbor]

Was anyone who had their individual 401(k) plan with Vanguard able to invest in "admiral class" stock index funds that have the lower expense ratio or are you restricted to the "investor class" funds which have the higher expense ratios?

I currently have an SEP-IRA with Vanguard but now thinking about opening up the Individual 401(k) instead.  In fact there is another blog that discusses rolling over the SEP-IRA into an Individual 401(k) but I guess Vanguard doesn't allow that, and requires an intermediate step of going through Fidelity.

[DavidAnnArbor]

As it turns out the SEP contributions you make are considered employER contributions, and you can also make these employER contributions to your Individual 401(k) plan so long as the contributions are limited to 25% of your net earnings from self-employment up to $52,000 (for 2014, $53,000 for 2015).

http://www.irs.gov/Retirement-Plans/Retirement-Plan-FAQs-Regarding-Contributions-How-much-can-I-contribute-to-my-self-employed-SEP-plan-if-I-participate-in-my-employer%E2%80%99s-SIMPLE-IRA-plan%3F

Now for the salary deferral portion, your individual limit each calendar year is $17,500 in 2014 and $18,000 in 2015 no matter how many plans you're in - 401(k), 403(b). A catch up for age 50 and above can also be added to that.

http://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan%3F

So it seems like I can have an SEP-IRA with Vanguard as well as the Individual 401(k), and add to both as long as I maintain the contribution limit rules.

I realize some high-income people don't want an SEP-IRA because they want to do the backdoor Roth Conversion, but I'm not anywhere near that income issue.

[DavidAnnArbor]

Well as it turns out I'm wrong according to representatives from Fidelity and Vanguard.

You can't split the employer/employee contributions to a SEP-IRA and an indivdual 401(k), you have to choose one vehicle or the other.  So for 2015 tax year I will choose the Individual 401(k) because of the superior savings potential over the SEP-IRA.  Unfortunately, because I already contributed some to my SEP-IRA for 2014 I'm locked out of utilizing an Individual 401(k) for 2014.

Finally, it is turning out that Fidelity offers index funds at a much lower expense ratio than does Vanguard, within the confines of the Individual 401(k) plans.

With Vanguard, even if you have $10,000 or more in the Total Stock Market Index Fund within the individual 401(K) you are only going to be able to be in the more expensive investor class mutual fund, the lower cost admiral class mutual fund is closed to you. That means you're paying an expense ratio of 0.17%, versus the 0.05% that Fidelity would charge for the same mutual fund  ($10,000 minimum).  With Fidelity you can start off with their investor class Total Stock Market index fund with an expense ratio of 0.10% which is automatically converted to the lower cost advantage class once the $10,000 minimum threshold is reached.
This theme is repeated with total international stock market fund, and total bond market index fund.

[DavidAnnArbor]

As it turns out when making the employEE contribution to the solo 401(k), the contribution can't be made until the actual money has been earned. For example, in January 2016 I can't contribute $20,000 to my solo 401(k) for the 2016 tax year because I have not yet earned that amount of business income to justify the contribution.