Solo 401K (E trade or TD Ameritrade?)

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Topic Author
Attica11
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Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Hi Bogleheads!

I am a contract worker that recently found out about solo 401K. I originally thought that you have to have an employer to have a 401K. I really wish college taught me this...

I currently have a Roth 401K in Vanguard that I max out ($6,000), and a taxable account that I contribute in every payday.

I read about mega Roth ira backdoor and how I could accomplish that with a solo 401K.

I have spent the last 7 hours reading, and my brain is really confused about the different brokerages. It seems that E-trade and TD Ameritrade are the best for solo 401K, but I am not sure which one is the best?

My plan is to just invest in a target fund or a 4 fund strategy. I am new to investing, just graduated last year and started investing last year.

Could someone point me in the right direction? \

Also does this strategy make sense? I should be opening up a solo 401K and max that with a Roth ira, and anything left over should go into a Robo non-tax-advantaged investing account for TLH?

I am 25, and I am really confused about all of this.

Thank you for your time!
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Duckie
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Duckie »

Attica11 wrote:I am a contract worker that recently found out about solo 401K.
So you are paid 1099 not W-2 and file Schedules C and SE with your taxes?
I currently have a Roth 401K in Vanguard that I max out ($6,000)
Do you mean you have a Roth IRA at Vanguard?
I read about mega Roth ira backdoor and how I could accomplish that with a solo 401K.
As a sole proprietor with a standard solo 401k you can contribute an employEE elective deferral, either pre-tax or Roth, up to $19.5K. Plus you can make an employER pre-tax contribution of roughly 20% of net income, up to a total of $57K (including the $19.5K).

The mega backdoor Roth involves making after-tax (non-deductible) contributions to the solo 401k which requires a non-prototype plan. Once contributed the after-tax contributions are either rolled in-plan to a Roth solo 401k sub-account or rolled in-service to a personal Roth IRA.
It seems that E-trade and TD Ameritrade are the best for solo 401K, but I am not sure which one is the best?
Right now E*Trade has the most flexible options, but that is a standard solo 401k and the mega backdoor Roth option is not available.
I should be opening up a solo 401K and max that with a Roth ira, and anything left over should go into a Robo non-tax-advantaged investing account for TLH?
I would not use a Robo taxable account. I would want to make my own choices.
Topic Author
Attica11
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Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Duckie wrote: Wed Oct 14, 2020 7:07 pm
Attica11 wrote:I am a contract worker that recently found out about solo 401K.
So you are paid 1099 not W-2 and file Schedules C and SE with your taxes?
I currently have a Roth 401K in Vanguard that I max out ($6,000)
Do you mean you have a Roth IRA at Vanguard?
I read about mega Roth ira backdoor and how I could accomplish that with a solo 401K.
As a sole proprietor with a standard solo 401k you can contribute an employEE elective deferral, either pre-tax or Roth, up to $19.5K. Plus you can make an employER pre-tax contribution of roughly 20% of net income, up to a total of $57K (including the $19.5K).

The mega backdoor Roth involves making after-tax (non-deductible) contributions to the solo 401k which requires a non-prototype plan. Once contributed the after-tax contributions are either rolled in-plan to a Roth solo 401k sub-account or rolled in-service to a personal Roth IRA.
It seems that E-trade and TD Ameritrade are the best for solo 401K, but I am not sure which one is the best?
Right now E*Trade has the most flexible options, but that is a standard solo 401k and the mega backdoor Roth option is not available.
I should be opening up a solo 401K and max that with a Roth ira, and anything left over should go into a Robo non-tax-advantaged investing account for TLH?
I would not use a Robo taxable account. I would want to make my own choices.
Hi Thank you so much for replying! It's my first year as a contractor so yep I will be filing as a 1099. I might have a W2 job in the future but right now I am hired only as a contractor. I am not sure what schedules C and SE are. I will have to educate myself on that.

I currently have a Roth IRA at Vanguard. From what I read I need a 401K as well, and I am just really confused about how to go about one if I don't have a employer.

I guess you bring up a good question, how important is mega backdoor roth option, and if it is then TD would be the way to go. If not the E trade would be the way to go.

Is the goal to get as much money into a roth ira as possible because it is a better option than a 401K?

Thanks!
latak215
Posts: 56
Joined: Sat Nov 26, 2016 7:41 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by latak215 »

I dare to say that you don't want to master mega at this time.first you want to make sure you are eligible for 401k . check irs official web site. then decide which brokerage. As you don't plan on frequent trading, consider vanguard. you can buy their mutual funds or etfs.VG web site explains the pros and cons well.etfs lets you diversify easily as well as rebalance when that need arises. Good luck
Spirit Rider
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Spirit Rider »

Attica11 wrote: Wed Oct 14, 2020 7:23 pm Hi Thank you so much for replying! It's my first year as a contractor so yep I will be filing as a 1099. I might have a W2 job in the future but right now I am hired only as a contractor. I am not sure what schedules C and SE are. I will have to educate myself on that.
Form 1099-NEC is how an independent contractor is paid not a tax filing status.

A sole proprietor files taxes for their independent contracting business on their personal tax return on Schedule C to pay income taxes. A self-employed individual files Schedule SE to pay self-employment taxes.

When did you start independent contracting? Self-employed individuals who do not have income tax withholding and FICA deductions (to pay Social Security and Medicare taxes).

If you did not have other sources of withholding, you were required to pay estimated income taxes and 15.3% SE taxes quarterly. If you have not done so, you will be subject to underpayment penalties.
I currently have a Roth IRA at Vanguard. From what I read I need a 401K as well, and I am just really confused about how to go about one if I don't have a employer.
A self-employed business is the employer. You are both employer and employee. Your business needs to adopt a one-participant 401k plan.
I guess you bring up a good question, how important is mega backdoor roth option, and if it is then TD would be the way to go. If not the E trade would be the way to go.
TD Ameritrade and none of the other brokerages support the features necessary for the Mega Backdoor Roth. As evidenced by your posts, such a plan should be the last thing on your mind.
Is the goal to get as much money into a roth ira as possible because it is a better option than a 401K?
A Roth IRA has more distribution flexibility than a one-participant 401k plan. However, depending on your marginal tax rates and facts and circumstances. It may be more advantageous to make one-participant pre-tax employee deferrals and employer contributions first.

It is pretty clear from your posts, the first thing you should do is engage a competent professional. You do not currently have the knowledge, skills and experience to DIY. A one-participant 401k should be the least of your worries until you get the necessary sole proprietor accounting established and start paying your estimated income and SE taxes.
Luckywon
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Luckywon »

What's your approximate income from your business and how much of that are you able to save for investing? That is relevant to deciding whether a SEP IRA or individual 401K may be the right choice, and also whether a mega backdoor Roth is a good idea.
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Duckie
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Duckie »

Attica11 wrote:It's my first year as a contractor so yep I will be filing as a 1099. I might have a W2 job in the future but right now I am hired only as a contractor. I am not sure what schedules C and SE are. I will have to educate myself on that.
As a self-employed person when you file your 1040 taxes you will have to add Schedule C which figures your business profit and Schedule SE which figures your self-employment taxes (aka Social Security and Medicare).
I currently have a Roth IRA at Vanguard. From what I read I need a 401K as well, and I am just really confused about how to go about one if I don't have a employer.
You contact the custodian you want to use and have them open a solo 401k (aka Self-Employed 401k, Individual 401k, One-participant 401k, etc.).
I guess you bring up a good question, how important is mega backdoor roth option, and if it is then TD would be the way to go. If not the E trade would be the way to go.
I don't think TD Ameritrade's standard solo 401k offers the mega backdoor Roth option either. To use that you would have to set up a non-prototype plan and that is more expensive, plus way more complicated.
Is the goal to get as much money into a roth ira as possible because it is a better option than a 401K?
The goal is to contribute as much as you can afford to retirement accounts.

Some advantages of E*Trade are that you can:
  • Make Roth solo 401k employee contributions, not just pre-tax. Not all plans allow this.
  • Roll pre-tax assets from other plans (TIRA, 401k, 403b, etc.) into the plan. This could be very useful. Not all plans allow this.
  • Borrow from the plan. It's not a good idea, but it's an option. Not all plans allow this.
  • Convert pre-tax contributions to Roth in-plan. This step would be taxable. Not all plans allow this.
    (This is not the mega backdoor method because these conversions are pre-tax to Roth, not after-tax to Roth.)
Topic Author
Attica11
Posts: 15
Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Luckywon wrote: Wed Oct 14, 2020 8:49 pm What's your approximate income from your business and how much of that are you able to save for investing? That is relevant to deciding whether a SEP IRA or individual 401K may be the right choice, and also whether a mega backdoor Roth is a good idea.
I don't have a business right now but from the contract work I am making about 52K pre-tax, and that contract work may become a full-time W-2 Job soon.

I also have another contract job that makes about 50K a year as well.

Thank you! I am still confused about Mega backdoor Roth, is that when I put money into a solo 401K and then convert that solo 401K money into my roth ira account? So when I take money out it is not taxed.

Thanks!
Topic Author
Attica11
Posts: 15
Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Duckie wrote: Wed Oct 14, 2020 8:50 pm
Attica11 wrote:It's my first year as a contractor so yep I will be filing as a 1099. I might have a W2 job in the future but right now I am hired only as a contractor. I am not sure what schedules C and SE are. I will have to educate myself on that.
As a self-employed person when you file your 1040 taxes you will have to add Schedule C which figures your business profit and Schedule SE which figures your self-employment taxes (aka Social Security and Medicare).
I currently have a Roth IRA at Vanguard. From what I read I need a 401K as well, and I am just really confused about how to go about one if I don't have a employer.
You contact the custodian you want to use and have them open a solo 401k (aka Self-Employed 401k, Individual 401k, One-participant 401k, etc.).
I guess you bring up a good question, how important is mega backdoor roth option, and if it is then TD would be the way to go. If not the E trade would be the way to go.
I don't think TD Ameritrade's standard solo 401k offers the mega backdoor Roth option either. To use that you would have to set up a non-prototype plan and that is more expensive, plus way more complicated.
Is the goal to get as much money into a roth ira as possible because it is a better option than a 401K?
The goal is to contribute as much as you can afford to retirement accounts.

Some advantages of E*Trade are that you can:
  • Make Roth solo 401k employee contributions, not just pre-tax. Not all plans allow this.
  • Roll pre-tax assets from other plans (TIRA, 401k, 403b, etc.) into the plan. This could be very useful. Not all plans allow this.
  • Borrow from the plan. It's not a good idea, but it's an option. Not all plans allow this.
  • Convert pre-tax contributions to Roth in-plan. This step would be taxable. Not all plans allow this.
    (This is not the mega backdoor method because these conversions are pre-tax to Roth, not after-tax to Roth.)
Wow, thanks Duckie! You are super helpful! I think I will go with Etrade then.

Would it make sense for me to put money into the solo 401K first, max that out, and then max the Roth IRA, and then the rest into a taxable account?

I didn't know about solo 401K, and I have been putting money into a taxable account bi weekly since beginning of 2020, should I sell all of it and transfer it to the solo 401K account for future tax reasons?

I know I will have to eat the capital gain tax as income tax since it is within a year.

I was thinking about just opening up a target date fund for the 401K and just dump as much money as the limit allows me.

I am only 25 right now, and I am hoping to achieve FIRE to retire early.

Thanks!
Katietsu
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Katietsu »

A regular solo 401k plus a Roth IRA sounds like a good combination for you. You must follow certain procedures for the solo 401k. You are the plan sponsor. Your questions imply that you need help making sure you do this correctly.

I will repeat what others have said. You are the employer. You do have a business for income tax and retirement plan purposes. It is a self proprietor business with just one employee, you.

Have you been making estimated tax payments? Do you know what records you need to be keeping? Do you understand that if you earn $100,000 in 1099 income, you could have a federal tax bill of close to $25,000?
Topic Author
Attica11
Posts: 15
Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Katietsu wrote: Wed Oct 14, 2020 9:36 pm A regular solo 401k plus a Roth IRA sounds like a good combination for you. You must follow certain procedures for the solo 401k. You are the plan sponsor. Your questions imply that you need help making sure you do this correctly.

I will repeat what others have said. You are the employer. You do have a business for income tax and retirement plan purposes. It is a self proprietor business with just one employee, you.

Have you been making estimated tax payments? Do you know what records you need to be keeping? Do you understand that if you earn $100,000 in 1099 income, you could have a federal tax bill of close to $25,000?
Thank you! I have been putting money away in a savings account for taxes. Since my pay isn't steady month after month, I have just been putting 25% of income into a savings account for 2020 taxes. Do you have any recommendations on how to estimate tax payments?

Thanks! It's my first time managing all this.

I was reading that solo 401K can be rolled into an In plan Roth (IRR), and Etrade allows that but it doesn't allow mega backdoor contribution.

my question would be is it better to have more retirement money in a 401k or a roth 401k?

Also what is the difference between mega backdoor contribution and in plan Roth IRR?

Is the goal here to get as much money into a roth ira account as possible so you won't have to pay taxes in the future?

Thanks again!
Luckywon
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Luckywon »

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Last edited by Luckywon on Fri Oct 16, 2020 11:45 am, edited 1 time in total.
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Duckie
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Duckie »

Attica11 wrote:Would it make sense for me to put money into the solo 401K first, max that out, and then max the Roth IRA, and then the rest into a taxable account?
Since you should not contribute as the employER until you have your income figured, and that's at the end of the year, I recommend you max your Roth IRA at $6K, and your solo 401k employEE portion of $19.5K as you get your income. The employER portion comes later. Taxable is last.
I didn't know about solo 401K, and I have been putting money into a taxable account bi weekly since beginning of 2020, should I sell all of it and transfer it to the solo 401K account for future tax reasons?
Open the solo 401k and contribute the max employEE portion of $19.5K. If you have not already maxed your Roth IRA, do so. Wait until January to contribute the employER portion.
I was thinking about just opening up a target date fund for the 401K and just dump as much money as the limit allows me.
You open up a solo 401k plan. You purchase a fund. A target-date fund is acceptable, but may not be the best idea. E*Trade has zero transaction fees for some mutual funds. You could buy the following individual funds with no transaction fees (NTF):
  • (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
  • (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)
  • (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)
If you want a target date fund consider:
  • (VTTSX) Vanguard Target Retirement 2060 Fund (0.15%)
I have been putting money away in a savings account for taxes. Since my pay isn't steady month after month, I have just been putting 25% of income into a savings account for 2020 taxes. Do you have any recommendations on how to estimate tax payments?
Read Form 1040-ES. You should have been making quarterly tax payments, either on paper or online, once you started your contracting work.
I was reading that solo 401K can be rolled into an In plan Roth (IRR), and Etrade allows that but it doesn't allow mega backdoor contribution.
Correct. You can convert your pre-tax employEE contributions (I'm not sure about the employER contributions) to the Roth sub-account. You will have to pay taxes on the converted amount.
my question would be is it better to have more retirement money in a 401k or a roth 401k?
For most people pre-tax 401k contributions and Roth IRA contributions work best. It depends on how much you make now vs. how much you expect to make later.
Also what is the difference between mega backdoor contribution and in plan Roth IRR?
Mega backdoor involves after-tax contributions that when converted create minimal if any taxes. The Roth IRR could involve pre-tax to Roth or after-tax to Roth depending on the specific plan rules. E*Trade's standard solo 401k plan allows only pre-tax to Roth. Most other standard plans don't allow Roth IRRs at all.
Is the goal here to get as much money into a roth ira account as possible so you won't have to pay taxes in the future?
No, because it depends not only on your tax bracket now, but your tax bracket when you retire. Many people earn a lot while working and have higher tax brackets at that time. Once retired their income goes down and it costs less in taxes to withdraw or convert at that time.

If you're going to open a solo 401k for 2020 you have to get it done before the end of December. You can contribute in 2021 for 2020 but the plan has be created in 2020.
Topic Author
Attica11
Posts: 15
Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Duckie wrote: Thu Oct 15, 2020 5:22 pm
Attica11 wrote:Would it make sense for me to put money into the solo 401K first, max that out, and then max the Roth IRA, and then the rest into a taxable account?
Since you should not contribute as the employER until you have your income figured, and that's at the end of the year, I recommend you max your Roth IRA at $6K, and your solo 401k employEE portion of $19.5K as you get your income. The employER portion comes later. Taxable is last.
I didn't know about solo 401K, and I have been putting money into a taxable account bi weekly since beginning of 2020, should I sell all of it and transfer it to the solo 401K account for future tax reasons?
Open the solo 401k and contribute the max employEE portion of $19.5K. If you have not already maxed your Roth IRA, do so. Wait until January to contribute the employER portion.
I was thinking about just opening up a target date fund for the 401K and just dump as much money as the limit allows me.
You open up a solo 401k plan. You purchase a fund. A target-date fund is acceptable, but may not be the best idea. E*Trade has zero transaction fees for some mutual funds. You could buy the following individual funds with no transaction fees (NTF):
  • (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
  • (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)
  • (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)
If you want a target date fund consider:
  • (VTTSX) Vanguard Target Retirement 2060 Fund (0.15%)
I have been putting money away in a savings account for taxes. Since my pay isn't steady month after month, I have just been putting 25% of income into a savings account for 2020 taxes. Do you have any recommendations on how to estimate tax payments?
Read Form 1040-ES. You should have been making quarterly tax payments, either on paper or online, once you started your contracting work.
I was reading that solo 401K can be rolled into an In plan Roth (IRR), and Etrade allows that but it doesn't allow mega backdoor contribution.
Correct. You can convert your pre-tax employEE contributions (I'm not sure about the employER contributions) to the Roth sub-account. You will have to pay taxes on the converted amount.
my question would be is it better to have more retirement money in a 401k or a roth 401k?
For most people pre-tax 401k contributions and Roth IRA contributions work best. It depends on how much you make now vs. how much you expect to make later.
Also what is the difference between mega backdoor contribution and in plan Roth IRR?
Mega backdoor involves after-tax contributions that when converted create minimal if any taxes. The Roth IRR could involve pre-tax to Roth or after-tax to Roth depending on the specific plan rules. E*Trade's standard solo 401k plan allows only pre-tax to Roth. Most other standard plans don't allow Roth IRRs at all.
Is the goal here to get as much money into a roth ira account as possible so you won't have to pay taxes in the future?
No, because it depends not only on your tax bracket now, but your tax bracket when you retire. Many people earn a lot while working and have higher tax brackets at that time. Once retired their income goes down and it costs less in taxes to withdraw or convert at that time.

If you're going to open a solo 401k for 2020 you have to get it done before the end of December. You can contribute in 2021 for 2020 but the plan has be created in 2020.
Wow thank you so much for helping out a recent grad! I wish they taught this stuff in college!

I will get started on filing taxes quarterly, I didn't know about that at all! I thought I just file it in April every year like everyone else.

What is the advantage of converting a pre-tax 401K contributions to a Roth sub-account, is the Roth sub-account the same thing as a Roth 401K?

I also had a question about this:

"No, because it depends not only on your tax bracket now, but your tax bracket when you retire. Many people earn a lot while working and have higher tax brackets at that time. Once retired their income goes down and it costs less in taxes to withdraw or convert at that time."

So if someone's tax bracket goes down after retirement, is it better to have more money in Roth accounts or pre-tax 401K accounts?

I guess after retirement when you have no or low income coming in, the pre-tax 401K will be taxed at a lower bracket. But the Roth will not be taxed at all... Still a little confused about this and which one is better.

I am going to do what you just said and open up a solo 401K at E-trade and use the 3 fund strategy. I noticed that the target date fund also includes a fourth fund of an index of international bonds(Vanguard Total International Bond Index Fund Investor Shares). What are your thoughts on that fund?

" E*Trade's standard solo 401k plan allows only pre-tax to Roth. Most other standard plans don't allow Roth IRRs at all."

To summarize:
What I need to do is to:
- keep maxing out my Roth IRA
- put 19.5K in solo 401k
- after filing my taxes for the entire year I can put more into the employER portion to max the 56K ,
- anything left over goes into a taxable account.

Are there any reasons for me to do an Roth IRR and move the 401K into a Roth 401K in the future? Or is there an age that people typically convert that?

Thanks!
User avatar
Duckie
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Re: Solo 401K (E trade or TD Ameritrade?)

Post by Duckie »

Attica11 wrote:I will get started on filing taxes quarterly, I didn't know about that at all! I thought I just file it in April every year like everyone else.
You file in April but you have to pay throughout the year. If you were getting W-2 paychecks the taxes would be withheld from each check.
What is the advantage of converting a pre-tax 401K contributions to a Roth sub-account,
The advantage is you have more money into a Roth account. The disadvantage is that you have to pay taxes on it now.
is the Roth sub-account the same thing as a Roth 401K?
Basically yes. When you have an employer plan the pre-tax portion is standard, all plans have that. The Roth portion is optional.
I also had a question about this:

"No, because it depends not only on your tax bracket now, but your tax bracket when you retire. Many people earn a lot while working and have higher tax brackets at that time. Once retired their income goes down and it costs less in taxes to withdraw or convert at that time."

So if someone's tax bracket goes down after retirement, is it better to have more money in Roth accounts or pre-tax 401K accounts?
It's always better to have more money in Roth accounts all things being equal. But things are rarely equal. You have to choose when and how much taxes to pay. For most people their income is higher while working and lower after retirement. For them pre-tax contributions while working and withdrawals or possible conversions while retired is financially better. Some people are willing to pay more now even though they don't know what will happen in thirty or forty years.
I guess after retirement when you have no or low income coming in, the pre-tax 401K will be taxed at a lower bracket. But the Roth will not be taxed at all.
But the money originally contributed to the Roth was taxed. Someone here on this board did the figuring and found that if your tax brackets stayed the same from contribution to withdrawal it didn't matter if the contributions were pre-tax or Roth. It evened out. But for most people the brackets do not stay the same.
I noticed that the target date fund also includes a fourth fund of an index of international bonds(Vanguard Total International Bond Index Fund Investor Shares). What are your thoughts on that fund?
I wouldn't bother with international bonds as a separate fund but they're acceptable in the target-date fund.
What I need to do is to:
- keep maxing out my Roth IRA
Yes.
- put 19.5K in solo 401k
Yes, either pre-tax or Roth.
- after filing my taxes for the entire year I can put more into the employER portion to max the 56K
First, you will probably contribute as the employER before you file your taxes.

Second, it's $57K for 2020 but that doesn't mean you can actually contribute that much. Let's say you make $100K net income in 2020 as sole-proprietor and open a solo 401k with Roth option. You contribute $19.5K as Roth employEE elective deferral. In January you figure your net income minus one-half self-employment tax is $93K (using round numbers for simplicity). $93K times 20% contribution rate is $18.6K. That is the max you can contribute as the employER. However, you will need to use the "Deduction Worksheet for Self-Employed" found on page 22 of Publication 560 Retirement Plans for Small Business. (A solo 401k is a qualified plan.) In this case the employER amount is not reduced. So you can contribute $19.5K Roth as the employEE and $18.6K pre-tax as the employER.
- anything left over goes into a taxable account
Yes, except you need to save for the next round of estimated taxes.
Are there any reasons for me to do an Roth IRR and move the 401K into a Roth 401K in the future?
It looks like you make enough income now to contribute to a Roth solo 401k directly (not Roth IRR) and still have enough left over to contribute substantially to taxable. If that is the case I would contribute the $19.5K employEE elective deferral directly to the Roth sub-account which would increase your taxes slightly and then contribute less to taxable. That gets more money into the Roth.
Or is there an age that people typically convert that?
It's not so much an age as when their tax brackets go down, even if temporarily.
Topic Author
Attica11
Posts: 15
Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Duckie wrote: Fri Oct 16, 2020 4:15 pm
Attica11 wrote:I will get started on filing taxes quarterly, I didn't know about that at all! I thought I just file it in April every year like everyone else.
You file in April but you have to pay throughout the year. If you were getting W-2 paychecks the taxes would be withheld from each check.
What is the advantage of converting a pre-tax 401K contributions to a Roth sub-account,
The advantage is you have more money into a Roth account. The disadvantage is that you have to pay taxes on it now.
is the Roth sub-account the same thing as a Roth 401K?
Basically yes. When you have an employer plan the pre-tax portion is standard, all plans have that. The Roth portion is optional.
I also had a question about this:

"No, because it depends not only on your tax bracket now, but your tax bracket when you retire. Many people earn a lot while working and have higher tax brackets at that time. Once retired their income goes down and it costs less in taxes to withdraw or convert at that time."

So if someone's tax bracket goes down after retirement, is it better to have more money in Roth accounts or pre-tax 401K accounts?
It's always better to have more money in Roth accounts all things being equal. But things are rarely equal. You have to choose when and how much taxes to pay. For most people their income is higher while working and lower after retirement. For them pre-tax contributions while working and withdrawals or possible conversions while retired is financially better. Some people are willing to pay more now even though they don't know what will happen in thirty or forty years.
I guess after retirement when you have no or low income coming in, the pre-tax 401K will be taxed at a lower bracket. But the Roth will not be taxed at all.
But the money originally contributed to the Roth was taxed. Someone here on this board did the figuring and found that if your tax brackets stayed the same from contribution to withdrawal it didn't matter if the contributions were pre-tax or Roth. It evened out. But for most people the brackets do not stay the same.
I noticed that the target date fund also includes a fourth fund of an index of international bonds(Vanguard Total International Bond Index Fund Investor Shares). What are your thoughts on that fund?
I wouldn't bother with international bonds as a separate fund but they're acceptable in the target-date fund.
What I need to do is to:
- keep maxing out my Roth IRA
Yes.
- put 19.5K in solo 401k
Yes, either pre-tax or Roth.
- after filing my taxes for the entire year I can put more into the employER portion to max the 56K
First, you will probably contribute as the employER before you file your taxes.

Second, it's $57K for 2020 but that doesn't mean you can actually contribute that much. Let's say you make $100K net income in 2020 as sole-proprietor and open a solo 401k with Roth option. You contribute $19.5K as Roth employEE elective deferral. In January you figure your net income minus one-half self-employment tax is $93K (using round numbers for simplicity). $93K times 20% contribution rate is $18.6K. That is the max you can contribute as the employER. However, you will need to use the "Deduction Worksheet for Self-Employed" found on page 22 of Publication 560 Retirement Plans for Small Business. (A solo 401k is a qualified plan.) In this case the employER amount is not reduced. So you can contribute $19.5K Roth as the employEE and $18.6K pre-tax as the employER.
- anything left over goes into a taxable account
Yes, except you need to save for the next round of estimated taxes.
Are there any reasons for me to do an Roth IRR and move the 401K into a Roth 401K in the future?
It looks like you make enough income now to contribute to a Roth solo 401k directly (not Roth IRR) and still have enough left over to contribute substantially to taxable. If that is the case I would contribute the $19.5K employEE elective deferral directly to the Roth sub-account which would increase your taxes slightly and then contribute less to taxable. That gets more money into the Roth.
Or is there an age that people typically convert that?
It's not so much an age as when their tax brackets go down, even if temporarily.
Thanks Duckie! Thank you for explaining everything so clearly.

I am a little fuzzy with the calculations. If my netincome is 100K then I con contribute 19.5K as a roth emoployEE elective deferral. So I would use open the solo 401K at Etrade with an roth option.

Put 19.5K in to the roth sub-account.

And to calculate my EmployER contribution it is Net income (100K) - 1/2 self-emploment tax = 93K. The self-employment tax would be whatever number comes out from the Form 1040-ES? Is there a rule of thumb on how much self-employment tax would be around? (like 25%?)

$93K times 20% contribution rate is $18.6K. Is 20% the highest contribution rate?

So the 19.5K as the employEE goes into the solo 401K Sub Roth account and the $18.6K pre-tax as the employER goes into the solo 401K account.

Also thanks for explaining about the tax bracket and perks of roth IRA.

Basically, most people would be someone that is in a higher tax bracket while working and lower bracket when retire would benefit more from a pre-tax 401K. When you retire, and pull money out then it would be counted as income and it would be at a lower bracket.

If someone expects to make more money after retirement then roth would be the better option (And megaback door roth would be a great strategy), because you are paying the tax now at a lower tax bracket compared to the future, and receive your future investments tax free.
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Duckie
Posts: 7585
Joined: Thu Mar 08, 2007 2:55 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Duckie »

Attica11 wrote:The self-employment tax would be whatever number comes out from the Form 1040-ES?
Yes.
Is there a rule of thumb on how much self-employment tax would be around? (like 25%?)
It's 15.3% (see Schedule SE, Section A, Line 5).
$93K times 20% contribution rate is $18.6K. Is 20% the highest contribution rate?
If you look at page 22 of Publication 560 you'll see the "Rate Table for Self-Employed". The highest plan rate is 25% but as a sole-proprietor your highest rate is 20%.
So the 19.5K as the employEE goes into the solo 401K Sub Roth account and the $18.6K pre-tax as the employER goes into the solo 401K account.
Yes. I might not have the account terminology correct but they go in two different accounts (or maybe sub-accounts).
Basically, most people would be someone that is in a higher tax bracket while working and lower bracket when retire would benefit more from a pre-tax 401K. When you retire, and pull money out then it would be counted as income and it would be at a lower bracket.
Yes.
If someone expects to make more money after retirement then roth would be the better option (And megaback door roth would be a great strategy), because you are paying the tax now at a lower tax bracket compared to the future, and receive your future investments tax free.
Yes.

I know you are really interested in the mega backdoor Roth but based on what you've written on this thread I don't think you're ready for it yet. However, here are two articles by tfb who posts here often:
Topic Author
Attica11
Posts: 15
Joined: Mon Mar 09, 2020 4:33 pm

Re: Solo 401K (E trade or TD Ameritrade?)

Post by Attica11 »

Duckie wrote: Fri Oct 16, 2020 6:32 pm
Attica11 wrote:The self-employment tax would be whatever number comes out from the Form 1040-ES?
Yes.
Is there a rule of thumb on how much self-employment tax would be around? (like 25%?)
It's 15.3% (see Schedule SE, Section A, Line 5).
$93K times 20% contribution rate is $18.6K. Is 20% the highest contribution rate?
If you look at page 22 of Publication 560 you'll see the "Rate Table for Self-Employed". The highest plan rate is 25% but as a sole-proprietor your highest rate is 20%.
So the 19.5K as the employEE goes into the solo 401K Sub Roth account and the $18.6K pre-tax as the employER goes into the solo 401K account.
Yes. I might not have the account terminology correct but they go in two different accounts (or maybe sub-accounts).
Basically, most people would be someone that is in a higher tax bracket while working and lower bracket when retire would benefit more from a pre-tax 401K. When you retire, and pull money out then it would be counted as income and it would be at a lower bracket.
Yes.
If someone expects to make more money after retirement then roth would be the better option (And megaback door roth would be a great strategy), because you are paying the tax now at a lower tax bracket compared to the future, and receive your future investments tax free.
Yes.

I know you are really interested in the mega backdoor Roth but based on what you've written on this thread I don't think you're ready for it yet. However, here are two articles by tfb who posts here often:
Thank you so much, Duckie! Whoever you are, just know that you really helped out a really confused recent college grad! I really appreciate you!
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