In order to pay minimal taxes when you do a backdoor Roth, you should have no balance in any other traditional, SEP or SIMPLE IRA. If you have a large balance in those accounts, you can rollover the money into an employer-sponsored plan such as a 401k or a 403b before you do the backdoor Roth.
When your employer plan has poor investment options, there’s an alternative: set up a solo 401k for yourself. Then you can rollover your traditional, SEP, or SIMPLE IRA to your own solo 401k.
What Is a Solo 401k
The IRS describes a solo 401k this way:
The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse.
Perfect For a Micro-Business
A solo 401k is perfect for a one-person or husband-and-wife business with no other employees. The business doesn’t have to be a full-time endeavor. Nor does it need to generate a large income. I started my solo 401k when I had only a few hundred dollars a year from self-employment.
Husband-and-Wife Sole Proprietorship
If you are married and both husband and wife want a solo 401k account, the easiest setup would be to operate the business as a “qualified joint venture.”
In short, both husband and wife own the business, both materially participate in it, and you split the income and expenses. You don’t set up any LLC or S-Corp. You just file a joint return with two Schedule C’s and two Schedule SE’s as sole proprietors. You would set up one solo 401k plan with two participants.
If you have one person as the owner and the other as a W-2 employee, you would have to run payroll ($30/month at one online payroll provider). Maybe it’s OK for a larger business. It’s not worth it when your business is making only a few hundred dollars a year.
If you have one person as the owner and the other person as an independent contractor on 1099, you would have two separate businesses, and two solo 401k plans with one participant each. It’s more complicated than just having husband and wife co-own the same business.
Setting Up a Solo 401k
First get an EIN from the IRS online. Then fill out some paperwork from a solo 401k provider. I use Fidelity and I recommend it without reservation for this purpose. Fidelity has detailed getting started guide on its website. Fidelity doesn’t charge any setup or maintenance fee.
Vanguard’s solo 401k doesn’t accept incoming rollovers from IRAs. You can’t use it to enable the backdoor Roth. In addition, it doesn’t allow you to invest in lower-cost Admiral shares or ETFs. It ends up costing more than Fidelity.
Contributing to a Solo 401k
Contact your solo 401k provider for how to rollover existing assets from your traditional, SEP, or SIMPLE IRA.
Use my spreadsheet to calculate how much you can contribute from your self-employment income each year. See Solo 401k For Part-Time Self-Employment. Tax software such as H&R Block or TurboTax can calculate it too. Although it isn’t much when your self-employment income is low, I would still contribute each year when you have self-employment income. It keeps the plan active.
Investing In a Solo 401k
Fidelity lets you invest in practically anything in a brokerage account. See previous post on the best index funds and ETFs at Fidelity.
No CPA Needed
You don’t need a CPA when you run your simple business as sole proprietorship. Tax software such as H&R Block or TurboTax is fully capable of producing the necessary tax forms for your micro-business.
When your solo 401k plan assets exceed $250,000, you are required to file a Form 5500-EZ every year before July 31. It’s also a very simple form. Fidelity sends the necessary information for it every year. It takes less than 5 minutes to complete.
If you are self-employed just by yourself or together with your spouse, with no employees, a solo 401k can do everything a SEP IRA does. In many cases you can contribute more to a solo 401k than to a SEP IRA, but never the other way around. If you currently use a SEP IRA, you should consider switching to a solo 401k, especially if you want to enable the backdoor Roth.
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linda says
is it true one can contribute up to 125% income from self-employment in solo 401K?
hard to believe….
Harry says
Where did you see 125%? Use the link in the article to my spreadsheet to find out.
linda says
scroll down to “Maximum annual contribution”:
http://www.bankrate.com/calculators/retirement/individual-401-k-calculator.aspx
looks like you can put in the whole $9235+25% more into 401K in your spreadsheet?
Harry says
Not really. There’s another cap that BankRate article doesn’t mention. You can put in the employer contribution only if you have more profit, not when you already exhausted it with employee contributions. My spreadsheet gives the right numbers.
RabbMD says
Does your spreadsheet take into account the 0.9% ACA healthcare bill surcharge starting in 2013 going forward on income over $200,000 single and $250,000 married filling jointly going forward?
Because there was no married vs single line I assume not. It may not effect your ability to contribute to a solo 401k and unnecessary to include as well? I am still leaning about the specifics of this surcharge as I am sure most CPAs are as well.
Harry says
As I understand it, the 0.9% surcharge is a tax on the employee. The employer side still stays at 1.45%. Therefore all the calculation for solo 401k contributions referring to the employer’s portion of the self-employment tax isn’t affected by the 0.9% surcharge.
TJ says
Do you need an EIN or can you use your SSN ?
Harry says
You need an EIN separate from your SSN. Just use the IRS online application. You will get one at the end of the application steps.
JR says
Thanks for this info! For some reason, I did not realize you could roll a traditional IRA into your current employer’s 401k. In my case, this would allow me to roll my IRA to my 401k and roll my spouse’s IRA into a solo 401k, and then we’d be eligible for back door Roth.
dan says
Actually at Fidelity, I was told and was able to open a solo 401k without an EIN
Harry says
The IRS says you need an EIN.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Do-You-Need-an-EIN
You answer yes to “Do you have a Keogh plan?” A Keogh plan refers to a retirement plan for self-employed. Fidelity actually lists your solo 401k as a profit sharing Keogh plan.
Mike says
I have a 1-man operation…have for 10+ years and use a SEP IRA. Is there any advantage to a solo 401k? My AGI ranges between $100-$150k
Appreciate your site,
Mike
TJ says
There would only be advantage if 25% of your compensation is less than $52,000. Run the numbers.
https://investor.vanguard.com/what-we-offer/small-business/compare-plans?Link=facet
Larry Ludwig @ Investor Junkie says
The other advantage of a solo 401(k) over SEP IRA is some brokerages will allow you to take a loan on it.
Bernardr says
Another advantage is no UDFI tax when investing Solo 401k into real estate, if that’s your thing. If those cocncepts are unfamiliar – which they are to most – see: https://www.401kcheckbook.com/checkbook-control-retirement-compliance/self-directed-ubit-udfi-ubti/
TJ says
@TFB
Do you know if it’s possible to rollover the roth portion of a 401(k) to the Fidelity Solo 401(k)?
Harry says
It’s not possible. Fidelity doesn’t offer the Roth option in its solo 401k.
TJ says
Hmm.. Could Fidelity roll over the ROTH portion to a ROTH IRA and the traditional portion to a Solo 401(k)?
Seems I’m stuck with a mixed 401(k) with a 75bps net asset fee. Oh well.
Harry says
Yes you can roll over the Roth portion of your 401k from a previous employer to a Roth IRA at Fidelity or elsewhere and the traditional portion to the Fidelity solo 401k.
angel says
I will be having approx 300-400 dollars of profit on my side work this year. I also have a bad 401k in an old job that i want to roll over, but haven’t done it cause Im now doing the backdoor roth.
the question is can I open a solo 401k and contribute a minimum amount and at the same time roll over my old 401k there? I have approx 50k in the old job 401k. is that ok?
Harry says
Yes that’s OK. Make sure where you are opening the solo 401k will accept the incoming rollover contribution from your old 401k. Fidelity does. Vanguard does not, unless they changed the policy recently.
Angel says
Thank u so much!!
It’s funny the things one has to do in order to be able to have a better retirement plan or to be able to do a backdoor Roth.
The government should allow anyone contribute after tax money to a Roth regardless of income. At least that’s the way I see it
TJ says
It does seem strange that we have an income limit for ROTH’s, it’s not like it’s going to make much difference in the assets of the super wealthy with $5k/year going into a retirement account.
jr says
I have both a W2 job and a 1099 job as well. I am already maxing out my W2’s retirement 401 K plan but I am not in love with the options. Does it make sense to set up a Solo 401K for my 1099 income or just do a SEP and roll it over to a Solo 401K before I do my backdoor conversion?
Harry says
Depending on how much income you get from your 1099 job, if you set up a solo 401k you can contribute to the 401k at your W-2 job only to get the match and contribute the rest to your own solo 401k, in addition to making the employer contribution from the 1099 income. It’s too late for 2013 income (you can still do a SEP for 2013 before April 15). It would be good for 2014 and beyond.
UC says
Just discovered your blog looking for help on filing the 5500ez. I have a fidelity 401k and your form is perfect. Thank you!
Question regarding setting my wife as a partner in my business and participants in my 401k so we can double the contributions.
I tried to figure out the partnership income split “sweet spot” given the SE penalty of 12.4% (assume income above 250k).
You don’t happen to have a spreadsheet for that, do you? 😉
Harry Sit says
If you send me these info via the contact form, I will see how I can help you.
– The business’s net profit before any retirement plan contributions.
– Whether the business is taxed as an S-Corp or sole prop/qualified joint venture.
– How much employment income your wife earns outside the business.
JR says
My spouse is a sole proprietor who uses his SSN to file taxes. To open the solo 401k, he will need to get an EIN. Once he gets the EIN, which does he use on his taxes in the future? Can he keep using the SSN? Or If it’s the EIN, does that mean he will need to update his information with his customers, so that they send their 1099s with the EIN?
Chan says
Thanks for the spreadsheet calculator but how would the ROTH affect your contribution limits? I noticed it’s not included in the calculations. I was under the assumption that it’s included in the $17,500 ($23,000). My scenario for 2014 is $10,000 (457 through employer), $5,500 (ROTH) & $2,500 (Solo K-employee).
Harry Sit says
Roth IRA contribution doesn’t affect the contribution limit for solo 401k. It’s not included in the $17,500 ($23,000).
BB says
What happens to solo 401K if in future you get an employee and the employee does not want to participate in 401K? Are you prevented that year from making a contribution or does the plan need to be changed/terminated?
Harry Sit says
If the employee isn’t eligible (part-time working less than 1,000 hours a year), you can keep the plan. Otherwise the plan has to be changed or terminated.
Victor says
Hi! I would appreciate your insight in the following situation: If I am participating in Company A’s 401k+Profit sharing plan and max out $52k in total; at the same time open a self-employed 401k plan for a separate and unrelated consulting business, which will not allow me to defer any salary (since it’s been deferred by Company A’s 401k plan)….can I still make non-elective EMPLOYER contribution to the plan to the allowed max of $52k on this self-employed 401k plan?
Thank you in advance!
Harry Sit says
Yes, subject to the normal 20%/25% maximum on employer contribution depending whether your consulting business is taxed as a sole prop or S Corp. See Solo 401k For Part-Time Self-Employment.
Victor says
Thank you so much for your feedback!! I went thru your page on Solo 401k and saw your spreadsheet, awesome job!! I appreciate you sharing your knowledge on these issues.
On an unrelated note……how do you feel about a Cash Balance Plan with 401k PS? Do you feel the fees (not so nomimal at first glance in most cases) are worth the trouble? I would be interested in picking your brain on this subject if you don’t mind 🙂
Thanks again!
Harry Sit says
I don’t know enough about it. I only know my level of self-employment income doesn’t justify it. Something along the line of Schwab’s Personal Defined Benefit Plan can make sense (Schwab’s rule of thumb is age 50 with $250k in income). If you are in that territory it’s worth talking to the professionals.
Victor says
Ok. Thanks a bunch anyways! Keep up the good job and happy investing!! 😀
Mary says
Thanks for sharing! My husband and I own a LLC (no other participants). He is an independent Contractor. I have a full time job with company A and max out my 401 k at my company A acc. (17,500). 20% of our LLC net income would be 30,000. Can I tuckaway pretax 30,000 into my solo 401k with our LLC?
sean says
I had the same question!
FB, please let us know!
Harry Sit says
First divide up the income from the LLC between the two of you (if LLC is taxed as sole proprietor) or set the salary from the LLC (if it’s taxed as S-Corp). Then use my spreadsheet to calculate how much each person can contribute and receive contribution from the LLC. Enter the numbers for each person separately. Also note there are two tabs, one for sole proprietor and another for S-Corp. See Solo 401k For Part-Time Self-Employment.
Jan says
Can you tell me where on the tax return to report the Individual 401 K contributions?
1. The employee 23,000 if traditional (I’m not doing this but am curious)
2. the employee 23, 000 if ROTH ( I am doing this and assume it does not show up on tax return)
3. The employer 20/25% (I believe this must be traditional) ) ( I believe this is form 1040, line 28)
Thank you so much. I have reviewed the IRS publications and many sources and don’t see a clear answer as “contributions” are often referred to without specifying which type.
Really appreciate your help!
Harry Sit says
1) Line 28. 2) Does not show up. 3) Line 28 as one sum together with (1).
james says
Hi harry, Im a self employed proprietor with no employees. I recently etablished a solo 401k on dec 31 2014 with merill lynch so i have not made any contributions for 2014. My income for 2014 was 102,000. My question is can i make my max contributions for the 2014 tax year as both employee and employer still before april 2015 tax deadline?
Harry Sit says
For employee contributions, you had to sign an agreement with yourself on or before 12/31/2014 to say how much you as the employee wanted to contribute to the solo 401k. You can make employer contribution before tax filing deadline.
DaveKY says
I am starting a new job as an independent contractor hoping to make $250-350k. If I open a Solo 401k, can I make the employer contributions ($18k) designated as Roth contribution, and the employee contributions traditional contributions? I see above that you said Fidelity doesn’t allow Roth contributions, do you know which fund managers do?
Harry Sit says
Only the other way around. If the solo 401k provider allows (Vanguard does), you can make the employee contribution ($18k) as Roth and the employer contribution (20% sole prop or 25% of S-Corp salary) as Traditional.
Ryan says
Thank you for this article! Can a solo practitioner contribute both their employee deferrals, as well as all profit sharing employer contributions into the Roth portion of the 401k, or would some portion (profit sharing) have to be put into the Traditional portion?
Harry Sit says
Ryan – See the reply right above yours. Profit sharing employer contributions have to go in as pre-tax.
Dave says
Did you have to report your solo 401k account opening to your employer? If you work for a FINRA member full time this is required so I am wondering if there is any risk to your job when you open one.
Harry Sit says
I don’t work for a FINRA member. I don’t have to report it to my employer.
Paul says
2014 is the first year I had any self employment income and I also created a solo 401(k). It’s part-time work with minimal income (a couple hundred dollars) and no expenses, and I did create my own EIN with the IRS. I am employed full-time elsewhere. Do I report my self-employment income with a schedule C? Thanks for your great blog!
Harry Sit says
Schedule C-EZ and Schedule SE.
Paul says
Thank you very much
Chris says
Thank you for this wonderful article. I do want to confirm a few things though:
My wife has a EIN for some of her sporadic freelance work and we have reported in on C-EZ and SE schedules, so we are set here. So, we’d contact Fidelity and use the EIN to open a solo 401(k) with two participants (wife as owner, and myself as spouse). Next, transfer the traditional IRAs over to the solo 401(k). I’m good through here.
Here’s where I get a bit fuzzy. I know we’ll have self-employment reportable income this year and were contributing the maximum to our day job 401ks. We’ll have to reduce our day job 401k contributions, to make room for any self-employed 401k contributions, right? Also, since the side work is sporadic, does the solo 401k need a contribution every year? Or just in the years were there is self-employment income?
Thanks for your help.
Harry Sit says
You don’t automatically become an eligible participant just by being the spouse. If you go by the qualified joint venture setup, you have to materially participate in the business. See the link to the IRS site for more info.
You don’t have to reduce your day job 401k contributions. You can contribute to your solo 401k with only employer profit sharing contributions. See the linked article and spreadsheet on solo 401k for part-time self-employment. You don’t have to do it every year. Only in the years when you have self-employment income.
Barbara says
I mistakenly made my individual 401k contribution two weeks after my taxes were filed. The contribution was figured into the taxes. Is there a way to remedy this situation so that I don’t lose my contribution altogether? Thanks.
Harry Sit says
Not sure what mistake you made. Contact your individual 401k provider and see what they say.
David says
I have an EIN for my business. However, when going through the forms to setup an Individual 401K with Charles Schwab, they also ask for a second EIN for the “Plan Tax Identification Number”. They specifically point out that this is a different EIN from the business EIN.
I’m confused by this and can’t find great information, but some other places suggest they same thing: http://www.mysolo401k.net/ein-number/
Basically, that I need a EIN for the business, and then a second EIN for the retirement trust that my business manages.
Do you know anything about this? If I’ve already established my Solo 401K and used the business EIN for both identifiers, how do I correct this?
Harry Sit says
If you use Schwab and Schwab wants it, I think you should just get one. I found this on the IRS website:
“Retirement Plan Trustees should apply for an EIN for the plan’s trust in order to properly:
* report Form 945 deposits and other income tax withholding information, and
* provide Form W-9 to requesters of tax identification number certifications.
Trustees should not use the EIN of the Plan Sponsor for these purposes.”
http://www.irs.gov/Retirement-Plans/How-to-Obtain-or-Re-Establish-an-EIN-for-a-Retirement-Plan-Trust
Schwab will use it to report distributions. I don’t know where exactly you used the business’s EIN as the plan’s EIN. If you haven’t distributed from the plan you wouldn’t have withheld taxes and filed a Form 945. The 5500-EZ form asks for the employer’s EIN in item 2b. If you put down the business’s EIN in 2b you did it correctly. The trust’s EIN in item 4b is optional. I don’t think you need to make corrections anywhere, at least not with the IRS.
Harry Sit says
By the way if you currently use Fidelity or Vanguard for your solo 401k you don’t need a separate EIN for the plan because Fidelity or Vanguard acts as the trustee and they use their trust company’s tax ID when they report distributions. More on this in a new article next week.
Junior says
Great Blog! I have some part time income as an IC and I wanted to hire the wife. She she doesn’t participate in the materials of the business (just administrative activities). How would I go about actually hiring her (as a 1099) so I can make contributions to her own solo 401k? Would I still need to have payroll services for just the wife? I would love to keep it simple with the qualified joint venture but I don’t think administrative tasks would qualify her as a partner according to the IRS.
Harry Sit says
Just like if she works for any other business as an independent contractor. She sends your business an invoice. Your business pays her. After the end of the year your business issues a 1099-MISC to her. She’ll be the owner of her administrative business. She will file Schedule C-EZ and Schedule SE, and pay self-employment tax. She will set up her own solo 401k plan.
Yoni says
I have a tricky situation:
I have a Small Business (myself and business partner). We have 1 employee (my fiance) and we are getting married in November. I’d like to set up a Single K now and rollover my current SEP $. I need to borrow against it as I have a lot in there.
Would this be ok? At the end of the year we will be married, but right now we are not. How will the IRS view this?
Harry Sit says
All employees are eligible to participate unless they can be excluded by age (<21) or years of service (< 1 year). If you have eligible non-owner employees you can't set up the plan as a solo plan.
Yoni says
Hi Harry,
She is currently an employee, but at the end of the year we will be married. Does it matter? Can I set up the Solo 401K now?
Harry Sit says
If she’s eligible now you have to wait.
ron miles says
I retired from my company position mid-year this year and contributed to a 401k through work to the tune of $13,000. Now I am self employed and will receive a 1099 from my employer and want to contribute to a solo 401k. I will make in excess of $24,000. I am over 50 years of age. How much can I contribute to a solo 401k?
Harry Sit says
Have you tried the spreadsheet in Solo 401k For Part-Time Self-Employment?
Grant says
The discussion of EIN for the husband wife qualified venture isn’t very clear to me. I have a sole proprietor EIN already and we have always filed jointly, does she just use the same EIN on her schedule C or did we have to tell the IRS at the time we got the EIN that we were going to be a qualified venture? In other words, do we need a partnership EIN instead?
Harry Sit says
We use the same EIN on two Schedule C’s. No problems so far.
Jennie says
I have a Fidelity SE 401K. When I signed up, I told them I had no employees, because I thought by employees, they meant did I have any employees who would be eligible. I chose the eligibility election on the plan to be for no one under 21 years old. I actually have an employee, my child, way under 21 years, and so would be ineligible. Recently re-reading the Fidelity website, and then confirming with a Fidelity representative, it seems they really mean you cannot have this plan if you have any employees at all. Now, I am afraid to admit to Fidelity and ask them what happens when I did/do have and employee , when their rule was zero employees, and I actually had one for all three years I had the plan. I am worried they will say I wasn’t qualified to make the contributions and that would be a nightmare. Any suggestions?
LL says
Hi Harry,
I’m back again – once again your site covers the basics of what I’m researching. Several people above have touched on issues similar to mine, but not exactly. I am self-employed and have been forever. I have had a solo 401k for almost as long as it’s existed and generally max out the contributions. Both the 401k and the business were set up with the same EIN and I report under that EIN on my Schedule C. I have no W-2 income and the rest is 1099 under my EIN.
For 2015, I will have material self-employment income that was reported on a 1099 with my personal SSN, not my LLC’s EIN. I believe I can report them combined on my Schedule C (the nature of the service is very similar).
Can I also use the combined 1099 (SSN + EIN) income to determine my max 401k contribution, even though the 401k was established the LLC EIN? Thanks so much!!
Harry Sit says
I don’t know the answer. I would think it’s OK but I’m not sure. Why not give them a W-9 and have them use the EIN?
Walter Turner says
Harry,
New to your site. Fantastic resource. Feel grateful to have found it and appreciate you taking the time to provide such a valuable resource.
I’ve been contributing to a SEP-IRA for about 10 years as the only employee of my S-Corp. Well, until last year when I had my 2 kids do some light office work. My wife is now starting to help with the business as well. It would seem a Solo 401K has some significant advantages to a SEP-IRA especially given my new circumstances. I need some help with the math.
If the business generates $113,200 per year in profit before we pay ourselves or have the business contribute to the Solo 401K, can we break it down this way?:
Salary for me: $40K
Salary for spouse: $40K
Salary for child 1: $6,600
Salary for child 2: $6,600
(For simplicity’s sake I’m skipping over all of the calculations of FICA/Medicare/Medicaid, Unemployment, HSA, etc)
Can we then contribute to a Solo 401K as follows:
My employee contribution: $18K (max)
Spouse’s employee contribution: $18K (max)
Employer’s contribution for me $10K (25% of salary)
Employer’s contribution for spouse $10K (25% of salary)
For the example, this essentially means a deferral of $56K worth of income between my wife and I. (We could of course elect to make some of the employee’s contributions into a Roth 401K if our provider offers it, increasing our tax liability.)
The minor children work less than 1,000 hours per year, and as I understand it then aren’t considered qualified employees for the purposes of the Solo 401K’s requirements, correct?
My stumbling points are:
1. Is my math right? Specifically, it’s 25% of the employee’s salary that the employer can contribute?
2. Does the fact that I’m structured as an S-Corp impact this in any way? Is there any disadvantage to my structure as far as the Solo 401K is concerned?
3. I guess looking for the gotcha. Going from $100K in taxable income between 2 people to $44K in taxable income via Solo 401K contributions seems too good to be true. Am I missing something?
4. This massive % of income contribution to a deferred account opens the possibility of having my health insurance premiums and perhaps even out of pocket expenses subsidized through the ACA. Furthering the already obvious argument to sock away as much as I possibly can given the impact to cash. Again, I feel like this is all too good to be true. What am I missing here?
Harry Sit says
Excluding your kids who are under 21 or who work under 1,000 hours has to be explicitly chosen when you set up the plan. It’s not automatic. Be sure to choose it.
1) Your math is right.
2) S-Corp is fine.
3) Not missing anything. If the two of you work for outside employers earning $113,200 combined, you would be able to contribute $18,000 each plus employer match, for a total close to $40k, versus the $56k you proposed. You are just giving yourselves a richer match so-to-speak because you are nicer to yourselves than outside employers.
4) Not missing anything. Again if the two of you work for outside employers that don’t offer health insurance you would also get subsidies under ACA after you contribute $18k each to your 401k’s.
Chris says
Ugh!
Anybody interested in my TD Ameritrade experience?!
So, after A LOT or research, I went with TD Ameritrade for my new Solo 401k. I chose TDA because they have a large slate of Vanguard and Ishare ETFs in their commision free lineup. They allow a ROTH. They allow loans. They allow direct rollovers from ANY qualified account.
I terminated my Solo DB at Schwab and took the lump sum distribution, did a direct rollover to TDA. TDA had an offer of $2500 for opening an account with a transfer of over $1,000,000. Spoke with 2 different phone reps and rep in local San Diego TDA office: they all confirmed the $2500 offer as well as 100 free trades! The transfer went through without a hitch (sort of) but nothing but problems since.
1. TD elected to not honor the transfer offer. They decided that it did not apply to Solo 401k accounts because it would be an ERISA violation. My son ( CFP) checked with his local pension firm and their legal/compliance team. They called B.S. on that reason. They said that Solo 401K accounts are not covered by Title 1 of ERISA. In fact, the DOL is quite clear in specifically stating in CFR Title 29, Section 2510.3-3, an individual and his or her spouse are not considered EMPLOYEES! Classic bait and switch!
2. TDA does not allow ACH deposit transfers. I have to mail a check, pay for a bank initiated wire transfer or use my bank’s online bill pay (I went with this one). They put a hold on the deposited funds for 10 days!!! If I want to trade sooner, I have to call the 800 # and have a rep bypass the website hold.
3. Check all your transaction receipts!!! TDA was charging commissions on my initial ETF trades . . . .even though most were part of their commission-free ETF lineup and I had 100 free trades!!!!! They promptly refunded ~$100 in fees when I pointed it out though . . . .should I have to do that???
4. LOTS of minor problems with their website. For example, interface with Morningstar is buggy. The “Portfolio Planner” is a mess and doesn’t even recognize some of their commission free ETFs!
5. Discovered Schwab charged me $50 to transfer funds and SO DID TD AMERITRADE to receive the $$!!!
Wow, if I had it all to do over again, I would have stayed with Etrade!
Ugh!
Amrish K says
Harry,
I have an LLC with my wife – I work on software development and also work full time for a different employer while my wife has 1099 income working as a consultant. The LLC has about $70k in net income this year. If I understand correctly,
1) Salary breakdown
Myself: $15K
My Wife: $55k
2) Salary Deferral (after SE taxes approximated)
Myself: $0 (contribute $18 for my employers 401k)
My Wife: $18k
3) Employer Contribution (also adjusted for SE): 20% since we are LLC owners.
Myself: 20% x $15k = $3k
My Wife: 20% x $55k = $11k
4) My question is LLC partnership structure ok, and how do I pay ourselves salary (what constitutes earned income, since I’ve been told that K1 income will not qualify).
Thanks,
Amrish
Harry Sit says
K-1 income from a partnership you actively participate in counts as self-employment compensation.
tanvi says
so we just established LLC last month as my husband side kick clinic work began to pick up.. I was looking into opening up the solo 401k and anticipate income of 40K this year.
so given that, all his checks and reimbursements are still under his ssn and he has not transferred it to llc- He plan to obtain a court order saying he operates as sole proprietot under that LLC so he does not need to change the name and do all th eitdious paperwork for every insurance company for his reimbursements.
I am a member of the llc (god knows why I decided to be) but I only do the administrative part- booking keeping; office supplies, and other things)nothing much- does the 401k still needs to be under the name of LLC with both of our names or can he just apply for an individual EIN separately form LLC EIN we already have and open fidelity 401k(we already have a brokerage account with them) so even if the source of income or his practice /llc/location changes the 401k would be under his name and would not be affected?
tanvi says
i think I have been flooding this page:)
Thanks for all your help so far.IN the process of opening Fidelity Self Employment 401 k for my husband with 40k – 45 K worth self employment income.
He was working with a consulting company this year that will pay him on 1099 for a total of 38 K
in Oct he changed to a different locations where he now pays a monthly rent of 700$ to a social worker that does his administrative part and provides him with patients and office space- his later reimbursement perhaps around 3-5 k would be a mix of patients personal checks -with bulk of it individual Insurance company checks for which the COpays for the patient portion are still pending-
Now all these insurance company checks are issues on his name.- and 1099 was also for him on his SSN-
To open Fidelity account I obtained a EIN number- would the fact the payments made are to him on his SSN, make any difference when opening a 401k using his EIN- I am slightly confused on this..
Just want to make sure I do it right.
and the fact the the income is from two different sourse but type of clinic is same its technically like he moved the location – previously the consulting company received reimbursements and paid him on 1099- now its only rent he pays but he directly receives the reimbursements form the insurance.. (so hopefully the insurance companies issues him the 1099 at some point.
Please advise… its only getting more complicated for me
Harry Sit says
It makes no difference. Consult a CPA on moving the business under the LLC going forward.
Sri says
I was paid in 2016 for consultancy services I provided for year 2014. I was not paid for 2 years for reasons that are beyond what is being discussed here. I also work full time, participating in a 401K plan with salary deferral and employer contributions. I am interested in setting up a Solo 401K now in 2017. Is it too late to do that and contribute to that from income that I received in 2016? Should I still go ahead and apply for EIN just incase I have another income this year with my consultancy?
Harry Sit says
It’s too late for 2016. Applying for an EIN only takes 5 minutes. You can wait until you have self-employment income again.
Tommy says
Hi Harry, just found your article. I am over 50 and self employed only, and have not contributed to any 401k this year. Could I fund a Solo 401K with 1099-misc monies, if they are monies for which no self-employment taxes are required to be paid?
Harry Sit says
I don’t understand. If no self-employment taxes are required how does it make you self-employed? Anyway you can’t do anything with last year’s income unless you already have the plan established by the end of last year. You can only set up the plan for this year and future years.
Tommy says
Hi Harry,
This would be for 2017 1099-Misc. income for a possible unlawful discrimination settlement. I am told the portion of monies on the 1099-Misc are not subject to FICA or FUTA due to the nature of the damage award. They are subject to federal tax and since I am self employed wondered if I could fund the Solo 401k with these funds. I was told by an accountant that this was possible, but I am skeptical.
Harry Sit says
It depends on what you mean by “fund.” Include this income in calculating your maximum contribution, no. Literally use this money to contribute no more than the maximum calculated from your other self-employment income, yes. Money is fungible. If you didn’t have this money you can use any other money to contribute, as long as you don’t exceed the maximum you are otherwise allowed.
Em says
Hi Harry,
Just found this website and the information has been very helpful.
I am a sole properitor and have opened an individual 401K account (before 12/31/16). I had incorrectly selected not to permit Elective Deferrals under this plan. My plan administrator told me to fill out an amendment form to correct this mistake. Since my correction is past 12/31/16, will I be still able to contribute to the 401K plan as an Employee and Employer for the 2016 tax year?
Thanks,
Em
Harry Sit says
It can’t be retroactive. Elective Deferrals are only the employee contributions. Employer contribution is not affected.
David says
Harry, I have a really stupid question related to all this. I have set up the Solo 401k at Fidelity and have maxed out my contributions ($18,000 plus $6,000 catch up plus an additional $7,000 for profit sharing). What’s not clear to me in TurboTax is what I enter as my self-employment income. Do I use my gross income less expenses without consideration of these contributions, or do I reduce the self-employment income by the amount of these contributions before reporting it in TurboTax?
Harry Sit says
Gross income less expenses without consideration of these contributions, or more accurately gross income and expenses separately when the tax software asks about your business income and expenses respectively. The software will also ask you about the contributions, both the employee contributions of $18,000 plus $6,000 and the profit sharing contributions.
Jim says
Great site, thanks!
1. I’d like to do a backdoor Roth and would want to open a Fidelity solo 401k to rollover my old traditional IRA from previous years. My main job does not offer a 401k plan at work, but I am doing some school tutoring work on the side and will get this “consulting/tutoring” work reported on a 1099 form (which earns me about $1,000 a year). My main job does not offer a 401k or any other benefits plan. If I open a solo 401k as a consultant (and get an EIN, etc), does that mean that I would now be considered to be covered by a retirement plan at work? The IRS sets the IRA deduction limits differently depending on whether I am covered by a retirement plan at work (such as a 401k or not), so I was wondering if that means that I would now be considered in the category “covered” by a retirement plan at work (even if what I would be able to contribute to the 40k would be small)?
2. If yes to #2: Let’s say that I am a tutor this year and then stop by December 31 so that I do not earn this side income next year. I imagine I cannot contribute to the solo 401k next year since I would not be working as a tutor anymore, right? Would I still be able to keep my Fidelity solo 401k open in future years to use for rollovers if needed at least?
3. If yes to #3: does that mean that as long as I have the solo 401k account open or active, I will be considered “covered” by a retirement plan at work in the future? Or does that depend on whether I cannot contribute to it once my solo tutoring job ends? Can I keep it “open” to use for future rollovers even if I cannot contribute to it, and I would then be considered “not covered” with a retirement plan at work?
Harry Sit says
(1) You will be considered as covered.
(2) You can keep it in case you start doing business again in the future.
(3) You are not considered as covered when you are not contributing.
Jim says
Thank you!
Just to make sure I understand, I would open the solo 401k this year and do the rollover of the deductible TIRA portion. That way I can also do a tax-free backdoor Roth conversion with the non-deductible portion this year, and not pay taxes on the rollover and backdoor transfers.
Then next year, I can contribute to my TIRA the max annual contribution. If I can deduct that amount based on income limits, then let’s say I do that in 2018. Then the year after, say my income goes up and my TIRA contribution becomes non-deductible in 2019 – I could rollover the previous deductible portion into my solo 401k (that I opened in 2017, even if I am no longer working as a tutor/consultant then, because I can keep the 401k open for rollovers but just not contribute to it from my self-employment income that I no longer get), and then do the backdoor Roth with the 2019 amount.
Does that strategy makes sense so everything is done right and there are no tax consequences now or in the future? Or anything that I need to be aware of?
Harry Sit says
That works. Just to note when you are not covered by a retirement plan, you have an income limit for your IRA deduction only if you are married and your spouse is covered by a retirement plan. If you are single your traditional IRA contribution is always deductible when you are not covered by a retirement plan.
Spig says
One thing to note is that having a solo 401(k) *and* making contributions from your self-employed income could impact your ability to make deductible contributions to a traditional IRA as you are then considered “covered by a qualified plan”. See https://money.stackexchange.com/questions/105588/am-i-still-covered-by-my-self-employed-401k/105617#105617
James says
I have a part-time job consulting that gives me a few hundred bucks each month so I am thinking of opening a solo 401k with Fidelity like you suggested to rollover my existing traditional IRAs. I understand that I will have to sign up for an EIN and then make my consulting job as a sole proprietorship, which I would report when I file my personal taxes with the relevant tax schedules and SE forms (that TurboTax would generate).
1. I already get a 1099 for this consulting work, and I guess I am confused with how I would report it as a sole proprietorship come tax time? Would I indicate in TurboTax that the 1099 belongs to the proprietorship so it gets attached to the right forms, and not the portion with my W2s and such?
2. I get a 1099 from the client under my social security number. If I get an EIN to create my self-employed proprietorship, would I tell my client to report the 1099 using the EIN or still keep my SSN in the 1099? Or is the SSN for the 1099 (so no change with the client), and the EIN only applies for TurboTax to fill out the relevant self-proprietor forms?
3. As long as I am a consultant, I can contribute to my solo 401k (in addition to using it for rollovers from traditional IRAs if needed). After I stop this consulting job on the side, I assume that I can keep the solo 401k open and use it only for rollovers, but I would not be able to contribute to the 401k because my consulting income has ceased. Is this right?
4. After I stop this consulting job, do I keep the EIN open/active or do I have to close/cancel it? Would there be anything special I need to tell the IRS or do when filling out my taxes (with TurboTax) to say that the “business” stopped? Or just by telling the software when I fill out my taxes that there is no self-proprietorship business anymore, and then it just does not generate the SE forms/schedules and that is what tells the IRS that I am no longer engaged in that (even though I am keeping the solo 401k open)?
Thank you!
Harry Sit says
After you get the EIN, you give a new W-9 to your clients and have them update their records. They will give you 1099 with your EIN in the future. Your enter your 1099s into TurboTax, whether they have your SSN or EIN. TurboTax will generate the right forms. You can keep the solo 401k open when you don’t have self-employment income. You never know when you will have it again. When you don’t have self-employment income in any year, TurboTax won’t generate the related forms.
J says
Great site! I was reading this article and the one on doing a Backdoor Roth, where you wrote that if I have self-employment income, I could set up a solo 401k plan such as house-sitting, tutoring, etc.
So if I want to set up a solo 401k for some part-time consulting work I do just myself out of my home that pays a little (and I get a 1099 tax form for my work), I would apply for an EIN and open the solo 401k.
Do I also need to apply for a business license or certificate through the city clerk’s office? I was not sure if just getting the EIN is all I would need to do to set myself up as a sole-proprietorship, or if it would be more complex and I need to also look into things like getting a business license, opening a business bank account to keep that income separate, etc.?
Appreciate your help!
Harry Sit says
Business license or tax requirements vary by jurisdiction. My city requires a small tax but there’s an exemption for low revenue sole proprietor businesses.
JL says
I am thinking of opening a solo 401k for some small amount of side income I do as an independent contractor essentially to be able to do a backdoor Roth later on. If I become a sole proprietor for taxes and file it under schedule C and SE, I will let the tax program calculate the appropriate taxes for my income tax, social security, and such.
But if I open the solo 401k, I would be able to contribute to it based on my self-employment work (in addition to being able to rollover my traditional IRA into the 401k).
#1: The 401k contribution limits depend on the net profits, which would be small. If I do not know yet how much the net profits would be, I figure I will wait until early 2018 when I do my taxes, see how much the profits are, and then calculate the exact contribution for 2017 and contribute that amount. Is that the way to go? I guess that as long as I contribute by April 15, 2018 for the 2017 year, then I can still deduct it when I file 2017, so I don’t know if I am missing something by waiting to contribute?
#2: My side income is small and I was playing with online solo 401k calculators to see how much I can contribute – ie. if net profits are $1,000, then I could contribute $929 into the 401k. If I contribute that much and deduct it in my return, would my taxes from the sole proprietorship be almost nil? I guess I will see once I have my actual numbers, but it seems that a low self-employed income with max solo401k contribution and deduction, would work out nicely with taxes?
Thank you!
Harry Sit says
A sole proprietor can contribute after the end of the year before filing taxes. Most online calculators aren’t accurate for side income. They assume the self-employed person doesn’t work as an employee elsewhere. You can use calculator in the linked article or this one:
https://obliviousinvestor.com/solo-401k-contribution-calculator/
Harry Sit says
P.S. You have to make an election before the end of the year. The election can be a percentage, such as “25% of my self-employment income” or even “100% of my self-employment income not to exceed legal limits.”
linda says
hi, Harry,
my husband has a solo 401K (@Fidelity) from selfemployment (one person) and already 60 years old.
can he start to convert pre-tax 401K into Roth IRA (not in lump sum) over years? if yes, how?
rollover to traditional IRA (pre-tax as well), then convert to Roth IRA (and pay tax on conversion)?
can he do direct conversion from 401k to Roth?
Thanks
Harry Sit says
He can request a one-time withdrawal from the self-employed 401(k) either to his traditional IRA (followed by a conversion) or to his Roth IRA directly. The form is here:
https://www.fidelity.com/customer-service/forms-applications/overview
Click on Withdrawals and then the last form in the list: Withdrawal (One-Time) – Retirement Plan (Keogh).
If he has questions about how to fill out the form, call Fidelity customer service. There’s no limit in the frequency or the dollar amount for the one-time withdrawal.
linda says
sorry, I might add that he will continue contribute to this solo 401K and not intend to close it. is there a limit like one time withdrawal/rollover for solo 401K if one wants to keep it (after 59 1/2 no penalty)?
Thanks
Izabel Malta says
Hi, I’m terrible on finances, I’m a self-employee dog-walker and pet-sitter, work alone. My
husband has W2 normal employee job, no 401k thought. We do taxes together as one with an account firm. I pay my taxes as self-employee. Don’t make much money yearly. So, since we have no retirement plan, I’d like to have an 401 k. What do you suggest? Can I open in both names? Should I open it before Jan 31st so I can use maximum $ 6.500 for 2017 taxes?
Best Regards
Izabel
Harry Sit says
The deadline to adopt a solo 401k for 2017 already passed. It wouldn’t cover your husband either if he doesn’t work in your business. Each of you can contribute to an IRA for 2017 before tax filing deadline in April 2018.
Izabel Malta says
Thank you for the tip. If we contribute to IRA I still can open a solo 401k this year and transfer IRA for next year? Which IRA is the best for us? Can I open it in any institution?
Best Regards…
Izabel
Susan says
So I can set up a business that makes virtually almost no income – babysitting or dog walking.
then I can open a solo 401K and move over $250K in IRA funds and then be eligible for a back door roth ira?
Seems to easy to be true. Am I missing something.
Harry Sit says
It should be a legit business, not just doing it once.
Izabel Malta says
I’m a pet-sitter for years, would never be able to have $ 250k in funds…
Susan says
Izabel I already have the funds In a rollover/traditional IRA from previous career. But I am ineligible to open a Roth IRA due to spouse income.
harry. How much income would it take to make a business legitimate? I do some selling on eBay and Etsy but not sure if I have enough in profit (as compared to income) to be considered “legitimate “.
Harry Sit says
Many startup businesses lose money but there is no doubt they are a legit business. If you are selling on eBay, are you selling only items from your household you no longer need, or are you making or sourcing products to sell for a profit? Selling products you made yourself on Etsy looks more like a business if you demonstrate a continuous effort versus just a one-off. The IRS has a whole discussion on hobby versus business.