Opening a New Solo 401k

Posted by Madison on November 18, 2008

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 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.

Contribution Deadlines

One of the big advantages over a traditional 401k, is that you don’t need to contribute until your tax filing deadline (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.

Selection of Administrator

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

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

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 of all three.

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

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Comments to Opening a New Solo 401k

  1. Ironic timing. I sent my paperwork in for my Solo 401(k) today! I thought about going with Vanguard, but I didn’t want to pay $20 per year per fund.

    I’ve opted for E*Trade because there’s no maintenance free as long as you have enough money in your combined E*Trade accounts (I may have to pay the $25 this year, but never again), there were more than a thousand no load, no fee funds to choose from, I wasn’t limited to buying off a list of funds (I could buy stocks, bonds, ETFs, etc. if I wanted to), and MOST importantly they offer a Roth option.

    The paperwork is kind of a pain, can’t be done online, and I had to fill most of it out twice (1x for the Roth, 1x for the accompanying traditional). But you can shove a lot more money into a solo k than any other retirement account.


  2. What a comprehensive article on the Solo 401K! Thank you. I think I’ll share this with my blog readers.

    I really like your site and the valuable personal finance information you provide. I subscribed. Thanks for sharing your knowledge.


    Judith Stephens

  3. Great article. I need to open a solo 401k before Dec 31st, and am comparing plans right now. I love Vanguard, but may not go with them because of the fees they charge – $20 per fund unless you have $50k in total assets. I need to double check that though, and do some more research with other options.


  4. Solo 401k seems almost too good to be true. Been looking around for info. Is it really as flexible as it’s presented to be?


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