- My Dollar Plan - https://www.mydollarplan.com -

Opening a New Solo 401k

I recently opened a new self employed 401k (or solo 401k) plan. I set up one plan with two accounts, one for my husband and one for me.

It all started when I got an email from David at My Two Dollars [1] who was looking to compare self employed tax deferral options for his own business. As I was pointing out some pros and cons, I realized that I could use one of these myself!

Even though I’m beginning to withdraw retirement contributions, instead of contribute them, I remembered that it would allow me an easy way to facilitate my unconventional Roth IRA strategy to lower our tax bill [2].

Contribution Deadlines

One of the big advantages over a traditional 401k, is that you don’t need to contribute until your tax filing deadline [3] (plus extensions). It will open up an option to shelter additional money, if needed, after you file your taxes.

The deadline to set up a new plan is December 31, however, you don’t need to make any contributions when you set it up. I don’t plan to make a contribution until we know exactly how much we will need to defer at tax time.

Calculating Contributions

The contribution limits for 2008 are:

  • $15,500 deferral of your pre-tax income (less any contributions made to a 401k at your regular job).
  • Profit sharing contribution up to 25% of your pay, with a maximum of $46,000.
  • Total contribution is the sum of the deferral and profit sharing, limited to 100% of your pay.

Because of the two different types of contributions, it can get a little tricky to figure out, because you must account for self employment tax in the calculation. Here is a helpful calculator to determine your maximum contribution [4].

Selection of Administrator

I chose the self-employed 401k at Fidelity [5], mainly because Vanguard didn’t offer one when I set it up a few months ago. (Now they offer one [6].)

Fidelity has great fund choices for low cost index funds, and no plan fees. My Money Blog also completed a review [7] that confirmed my research. They also offer a Fidelity cash back credit card [8].

The only downside is that to access the index funds with .10% expense ratio, you need a minimum of $10,000 in each fund.

The process to set up the plan was easy. I couldn’t do it online, but I filled out the forms and sent them in. My new accounts were established within a week. It was painless.

Solo 401k Tidbits

Reporting. Once the plan reaches $250,000 in assets, you must complete a Form 5500. I used to complete these for clients back when I worked in Employee Benefits, so that shouldn’t be a problem.

Employees. The solo 401k is for you and your spouse only. Part-time employees who work less than 1000 hours per year can be excluded.

Pros and Cons. Checkout a complete rundown on the pros and cons of a solo 401k at Chance Favors.

Other Self Employed Tax Deferral Options

I selected the solo 401k, mainly because it usually gives the option to shelter as much income as possible, allowing more room to execute various tax strategies.

If you have a small business, there are other options you can consider including a SEP IRA and Simple IRA. Here is a great comparison [9] of all three.

Thanks to Patrick at Cash Money Life [10] for reminding me that I needed to write about my solo 401k!