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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Sue says
I have a corporate job and my husband doesn’t work but we both have IRAs. My plan is to follow your recipe to establish a handyman/dog walking business and establish 401Ks for each of us but I’m confused whether we need an EIN? The “qualified joint venture” says:
In General, Spouses Do NOT Need an Employer Identification Number (EIN) for the Qualified Joint Venture…
Grant says
You don’t have to have an EIN in order to file your taxes as a qualified joint venture, but you will need one in order to set up a solo 401(k). Your EIN is the first thing your 401(k) provider will ask for.
Sue says
I got the EIN and used it to set up a solo 401K. When I file our taxes, does the EIN come into play on our joint return? Or does the schedule C’s and SE’s only have our SS#’s?
TIA! Love your website!!
Harry Sit says
Sue – Schedule C asks for it. Take a look at the top of the PDF form.
Tinku says
I had a solo 401K FIdo for a single member LLC. For 2017, I changed LLC to partnership and added my wife. I also added wife to solo 401k @ FIdo.
To calculate contributions, is it the gross income i.e. Line 8 from Form 1065? Or is it Line 22, ordinary business income, which is after deductions?
Wife also does 18K 403b at her current job. How does this affect calculation for solo 401K for her?
Harry Sit says
The partnership has to allocate the self-employment income to each partner. Then it’s calculated separately for each partner. The $18k contribution to the 403b makes your wife not eligible to contribute any more as an employee. That amount plus any employer contribution to the 403b also counts against the $54k total limit for your wife.
Wilson says
Making anywhere from $3k-$5k side hustle this year and I might not make anything next year. Something like this should I open a SEP?
For the solo 401k if you’re making say $100 this month, $50 next etc, how do you calculate the employee contribution throughout the year bc unlike SEP you have until April for the previous year?
Jasmine says
other than a ein, do y need to do anything else? Do I need to set up a s corp? I live in California. My side gig doesn’t involve selling anything.
SHAILESH GUPTA says
I have had similar issues with Ameritrade
joe says
Hi Harry,
Your Solo 401k For Part-Time Self-Employment spreadsheet is a revelation. Thank you so much for posting and maintaining it. I have W2 income, as well as 1099 income as a sole proprietor for my side hustle and just opened a Solo 401k, so it is a really useful tool. I have a quick question about filling it out.
Line 13 asks for “Gross wages from day job.” My wife and I are married, filing jointly. Together, we had $125,029 in W2 wages for 2020 (1040 Line 1).
But she’s the breadwinner, so my individual W2 wages are much lower: $19,033 in Box 1 of my W2, and $38,533 in Box 3, Social Security Wages, the difference being the $19,500 employee deferral I contributed to the 401k at my day job.
My question: Which amount do I put on Line 13 in the spreadsheet as gross wages from my day job?
Harry Sit says
The gross wages number is used to calculate your self-employment tax. For you, use $38,533. That’s the gross wages from your job, before deducting the contribution to the 401k plan at your day job.
Joe M says
Great info, thanks! Your instructions are really helpful to navigate account related things!
I had set up a Fidelity solo 401k (keogh plan) from some self-employment work I did a few years ago. I haven’t contributed much to that plan and have even stopped that self employment work.
1. Fidelity sent me a letter about “Notification of Plan Restatement” that plan documents need to be updated every six years as per IRS. What exactly is this about since I was not expecting it? It seems that Fidelity will send me some forms later on that just require my signature and then be returned to Fidelity, is that basically it or is there anything else I would have to do? Does that affect anything else in terms of how the plan is used?
2. Fidelity also sent an annual statement to help with completing a Form 5500. Since my plan has <$250k, I assume that I still do not have to file a Form 5500 until I reach that balance and I can discard that annual statement until then. Is this correct or does that Plan Restatement change the filing threshold amount in any way? Just wanted to make sure and to avoid any penalties.
Thanks so much!
Harry Sit says
It’s normal and legally required to have the plan restatement every several years. I use a different provider and my provider asked me to do the same thing recently. It comes down to signing the documents as requested. It doesn’t change the 5500-EZ filing threshold. You file a 5500-EZ when the plan assets reach $250k or when you terminate the plan.
David says
Hi TFB – You have taught me about many savings opportunities I wouldn’t have known without your site. Thank you. I found a discrepancy in my understanding vs. what your sheet does with regards the maximum non-roth after tax contribution, cell F27.
In 2021 I had two employers and unincorporated self-employment income. I’m less than 50 years old. My first employer offered 401k, and I contributed 19,500. My second employer offers 403b. I contributed nothing to the 403b, but the employer contributed $942 to my account in their 403b. So my “Assumptions” in cells B14-B21 are: 2021 – $150,000 – $19,500 – no – $942 – no – $50,000 – 25%. The spreadsheet result in F27 is $29,598. My calculation result in $28,656. The difference is the $942 employer contribution to the 403b. Do you know which is correct? Thank you.
Harry Sit says
The spreadsheet assumes there’s only one “day job” employer and that employer has only one plan. It doesn’t work when you have two employers or when the same employer has both a 401k and a 403b.