solo 401k worth it, if I can only put $3200 a year in it?

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mrtimo
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solo 401k worth it, if I can only put $3200 a year in it?

Post by mrtimo » Sun Nov 18, 2018 1:44 am

I max out my w2 401k every year.
I also get 10-20k of sole-proprietor income each year.
Assuming I make 16k of sole-prop income, I can put in 20% of that as employer profit sharing, so $3,200. Alternatively, I could just pay 22% tax on that = $704 now.
Is it worth the hassle of a solo 401k to only shelter $3,200 (per year)? Thereby decreasing my tax bill by $704 this year?

aristotelian
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by aristotelian » Sun Nov 18, 2018 2:53 am

I have one for a similar side hustle. To me it is worth it. Remember, that is $700 every year so the benefit will add up. Also, I don't like my W-2 401k options, so I plan to underfund it next year and putting more in the Solo 401k.

Tdubs
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by Tdubs » Sun Nov 18, 2018 8:01 am

Curious, how much of a hassle is a solo 401k?

harvestbook
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by harvestbook » Sun Nov 18, 2018 8:04 am

Doesn't the employer side also save you 15.3 percent in SE taxes, so roughly another $100 invested tax-free?

I opened a s401k myself through Vanguard and it took all of maybe half an hour, an hour at the most. Seems like a pretty good return on your time.
I'm not smart enough to know, and I can't afford to guess.

Spirit Rider
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by Spirit Rider » Sun Nov 18, 2018 8:14 am

harvestbook wrote:
Sun Nov 18, 2018 8:04 am
Doesn't the employer side also save you 15.3 percent in SE taxes, so roughly another $100 invested tax-free?
Only if you are an S-Corp.

Employer contributions for self-employed individuals are not deducted on Schedule C and thus do not reduce business profit for Schedule SE. You still pay 15.3% SE tax on employer contributions.

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RickBoglehead
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by RickBoglehead » Sun Nov 18, 2018 8:16 am

You can put the rest in as an employee contribution.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

Traveller
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by Traveller » Sun Nov 18, 2018 8:20 am

RickBoglehead wrote:
Sun Nov 18, 2018 8:16 am
You can put the rest in as an employee contribution.
Can he if he is already maxing out his 401k from his W2 job?

Spirit Rider
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by Spirit Rider » Sun Nov 18, 2018 8:21 am

aristotelian wrote:
Sun Nov 18, 2018 2:53 am
I have one for a similar side hustle. To me it is worth it. Remember, that is $700 every year so the benefit will add up. Also, I don't like my W-2 401k options, so I plan to underfund it next year and putting more in the Solo 401k.
Be aware the employer contribution can be limited to (net self-employment earnings - employee elective contributions) / 2. This only happens at lower net self-employment earnings and will reduce your total one participant 401k contributions.

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RickBoglehead
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by RickBoglehead » Sun Nov 18, 2018 8:28 am

Traveller wrote:
Sun Nov 18, 2018 8:20 am
RickBoglehead wrote:
Sun Nov 18, 2018 8:16 am
You can put the rest in as an employee contribution.
Can he if he is already maxing out his 401k from his W2 job?
Was unclear if he was maxing out employer match or $18,500 employee side (plus $6,000 catch-up if 50+).
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

Ping Pong
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by Ping Pong » Sun Nov 18, 2018 8:38 am

As an alternative to a solo 401k, you can open a SEP-IRA. The employer contribution has the same 20% limit. Your employee limit is already maxed out at your W-2 job, so the solo 401k doesn’t help you there unless you would like to reduce your contributions to your w2 plan in order increase them in your own plan.

jacoavlu
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by jacoavlu » Sun Nov 18, 2018 8:47 am

OP if you’re the adventurous type you could establish a semi custom solo 401k which allows after tax non Roth contributions and in plan Roth rollover. Then you could contribute essentially all of the self employment income after tax, basically becoming bonus Roth space. Or you could contribute profit sharing (approx 20%) and after tax -> Roth (approx 60%).

Such plans are not free. But may be worth it to you if the self employment income is going to continue year to year and you plan to continue to max out employee deferral in a workplace plan.

You should also be funding an IRA every year for you and a spouse if applicable.

Topic Author
mrtimo
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by mrtimo » Sun Nov 18, 2018 5:28 pm

harvestbook wrote:
Sun Nov 18, 2018 8:04 am
I opened a s401k myself through Vanguard and it took all of maybe half an hour, an hour at the most. Seems like a pretty good return on your time.
What do you have to do each year at tax time?

Topic Author
mrtimo
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by mrtimo » Sun Nov 18, 2018 5:30 pm

jacoavlu wrote:
Sun Nov 18, 2018 8:47 am
OP if you’re the adventurous type you could establish a semi custom solo 401k which allows after tax non Roth contributions and in plan Roth rollover. Then you could contribute essentially all of the self employment income after tax, basically becoming bonus Roth space. Or you could contribute profit sharing (approx 20%) and after tax -> Roth (approx 60%).

Such plans are not free. But may be worth it to you if the self employment income is going to continue year to year and you plan to continue to max out employee deferral in a workplace plan.

You should also be funding an IRA every year for you and a spouse if applicable.
How much are such plans? Any recommendations on where to set one up?

jacoavlu
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by jacoavlu » Sun Nov 18, 2018 5:43 pm

there are several such vendors that offer these plans for less than $1,000 to establish and $100-$150 per year ongoing to maintain. That gets you a plan document and help getting things established, but doesn't get you real third party administration, so you have to be able to manage most things on your own. You can google "solo 401k after tax contributions" to find offerings.

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Duckie
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by Duckie » Sun Nov 18, 2018 6:02 pm

mrtimo wrote:How much are such plans? Any recommendations on where to set one up?
Here are two articles by tfb who did this:

avidsaver
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by avidsaver » Mon Nov 19, 2018 3:46 pm

mrtimo wrote:
Sun Nov 18, 2018 5:30 pm
jacoavlu wrote:
Sun Nov 18, 2018 8:47 am
OP if you’re the adventurous type you could establish a semi custom solo 401k which allows after tax non Roth contributions and in plan Roth rollover. Then you could contribute essentially all of the self employment income after tax, basically becoming bonus Roth space. Or you could contribute profit sharing (approx 20%) and after tax -> Roth (approx 60%).

Such plans are not free. But may be worth it to you if the self employment income is going to continue year to year and you plan to continue to max out employee deferral in a workplace plan.

You should also be funding an IRA every year for you and a spouse if applicable.
How much are such plans? Any recommendations on where to set one up?
MySolo401k seems to be recommended. From my reading you can also customize the plan with etrade to allow this though realize you are on your own as far as administering the thing and making sure what you do is compliant heh.

I have been reading up on Solo 401ks recently as well, and I think I am going to choose E-Trade (of all places, def. not what I expected when beginning my research) as they have the best free Solo 401k with the most options. I am definitely in the same boat or less $ wise as the OP, btw. So long as you go with a low fee option, it's likely worth it. SEP-IRAs seem good as well, but less scaleable as you need a ton of income to be able to put a lot of money into them using just the employer contributions whereas with the Solo 401k you can also contribute on the employee side. It's my understanding that if you have employees you could still have the s401k so long as your plan document outlines requirements for, say, 1000+ service hours, age 21+, etc which would at least give you time to pivot if you had to hire on an employee one year. With a SEP-IRA, any match you give yourself you also have to give to any employees (though based on their income not yours).

I'll let you guys know when I do decide who to go with and finally set it up how easy it ends up being, apparently the paperwork/setup shouldn't take more than an hour. We'll see!

reimann
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by reimann » Mon Nov 19, 2018 3:53 pm

I just opened a solo401K at schwab. Easy peasy.

jacoavlu
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by jacoavlu » Mon Nov 19, 2018 3:54 pm

While the free solo 401k plan at E*TRADE may offer in plan Roth rollover (you should confirm this) I do not believe the plan allows for after tax non Roth contributions.

I don’t believe any free brokerage solo 401k offering has features that allow execution of the so called mega backdoor Roth. Requiring 1) after tax non Roth contributions and 2) either a) in plan Roth rollover or b) in-service non hardship withdrawal.


That said, your actual plan sub-accounts (pretax, after tax, and Roth) for a custom solo 401k could be at perhaps any brokerage, typically these are called non-prototype accounts or brokerage-only accounts, in the name of the plan trust. Fidelity is most commonly used. I know folks have also used Schwab, E*TRADE, and Vanguard for this purpose.

gclancer
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Re: solo 401k worth it, if I can only put $3200 a year in it?

Post by gclancer » Mon Nov 19, 2018 4:32 pm

Ping Pong wrote:
Sun Nov 18, 2018 8:38 am
As an alternative to a solo 401k, you can open a SEP-IRA. The employer contribution has the same 20% limit. Your employee limit is already maxed out at your W-2 job, so the solo 401k doesn’t help you there unless you would like to reduce your contributions to your w2 plan in order increase them in your own plan.
This is what I do. I have an excellent 401(k) that accepts incoming rollovers and roll the SEP into that each year (otherwise the SEP would interfere with backdoor Roth which is an argument in favor of Solo 401(k)). You could also convert the SEP to a Roth IRA if that’s something you would want to do in the 22% federal bracket thereby giving you more Roth space.

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