Easiest way to establish a solo 401k?

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alexbogle
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Easiest way to establish a solo 401k?

Post by alexbogle »

What is the easiest way to establish self-employment income to make a solo 401k legal in the eyes of the IRS?

Details:

1. I will quit my current employer shortly but will not have employment for at least a few months.
2. My current employer 401k fees are exorbitant, so I do not wish to keep money in it.
3. I do not wish to rollover into a Traditional IRA as I would like to continue to have the option to perform a backdoor Roth IRA.
4. I intend to open the solo 401k at Fidelity.
5. I care mostly about doing a rollover of my current 401k funds into the solo 401k (not so much about new contributions as I've already maxed my personal 2023 contribution).

My understanding is that I require self-employment income to be able to create the solo 401k. What is an easy way to earn such income that would allow me to open the solo 401k?

One thing I thought of was to do something like doordash every once in a while. Do I need to create an LLC? Just get a separate EIN? Will working for doordash allow me to open the solo 401k in a justifiable (to the IRS) way?
"Learn every day, but especially from the experiences of others. It’s cheaper!” -- Jack Bogle
livesoft
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Re: Easiest way to establish a solo 401k?

Post by livesoft »

Get a separate EIN today online.

Walk into a Fidelity office and say "I want establish a solo 401(k) please." You might make an appointment at that office first.

I don't know what doordash is.
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Topic Author
alexbogle
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Re: Easiest way to establish a solo 401k?

Post by alexbogle »

livesoft wrote: Thu Jan 12, 2023 2:56 pm I don't know what doordash is.
doordash is like uber but for food. The drivers are paid as independent contractors.
"Learn every day, but especially from the experiences of others. It’s cheaper!” -- Jack Bogle
runner3081
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Re: Easiest way to establish a solo 401k?

Post by runner3081 »

Took about 2-weeks via mail to open one back in December w/Fidelity.

Not all Fidelity offices can do this.
aristotelian
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Re: Easiest way to establish a solo 401k?

Post by aristotelian »

Doordash should work. You may want to look at the IRS criteria for self-employment vs hobby income.
https://www.irs.gov/newsroom/earning-si ... a-business

Make sure the Solo 401k allows rollovers, not all of them do. I believe Schwab works.
HomeStretch
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Re: Easiest way to establish a solo 401k?

Post by HomeStretch »

How much in 401k fees and ERs will you pay for 3-6 months?

Perhaps it’s not necessary to do anything until you are re-employed in a few months and are possibly able to rollover your old 401k to your new 401k.

Fidelity, Vanguard and E*Trade Solo 401k plans allow rollovers in.
Topic Author
alexbogle
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Re: Easiest way to establish a solo 401k?

Post by alexbogle »

HomeStretch wrote: Thu Jan 12, 2023 3:14 pm How much in 401k fees and ERs will you pay for 3-6 months?

Perhaps it’s not necessary to do anything until you are re-employed in a few months and are possibly able to rollover your old 401k to your new 401k.

Fidelity, Vanguard and E*Trade Solo 401k plans allow rollovers in.
they'll amount to a few hundred dollars, somewhere between $500 to $1000. I also have a personal issue with this company and would prefer not to give them any money.
"Learn every day, but especially from the experiences of others. It’s cheaper!” -- Jack Bogle
vaylie
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Re: Easiest way to establish a solo 401k?

Post by vaylie »

For self-employment income, I think side gigs like door dash definitely count. I personally make extra income doing surveys on places like Prolific, which is pretty flexible and costs very little in expenses beyond your time. As long as you're smart about avoiding those low-paying surveys, it's not a bad deal. I hear a lot of negative buzz from friends who've stopped doordashing or doing ubereats due to high gas prices recently.

Question: How much $$ do you have in your 401k that you want to roll over? Keep in mind that you have to file the 5500-EZ form if you have $250k+ and failing to file or filing late results in very very heavy penalties. Do a search in this forum to hear some horror stories. It's something to keep in mind, because you're saying that you want the *option* to do a backdoor Roth, not that you currently need to do it, right? So maybe it might be worth while to just keep things in a Rollover IRA until you get another job whose 401k might accept a rollover from an IRA.
placeholder
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Re: Easiest way to establish a solo 401k?

Post by placeholder »

As this is early in the year you should wait a bit until you get new employment and find out the particulars there first.
Topic Author
alexbogle
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Re: Easiest way to establish a solo 401k?

Post by alexbogle »

vaylie wrote: Thu Jan 12, 2023 7:38 pm Question: How much $$ do you have in your 401k that you want to roll over? Keep in mind that you have to file the 5500-EZ form if you have $250k+ and failing to file or filing late results in very very heavy penalties. Do a search in this forum to hear some horror stories. It's something to keep in mind, because you're saying that you want the *option* to do a backdoor Roth, not that you currently need to do it, right? So maybe it might be worth while to just keep things in a Rollover IRA until you get another job whose 401k might accept a rollover from an IRA.
Thank you for the heads up on the form. I do have over 250K and will have to be sure to file.

I've done a backdoor Roth for the past few years and already did one this year as well. Because of the hiatus, I may not actually have needed to backdoor it this year but didn't want to have to deal with redoing it later if I did. I expect to need to backdoor next year in any case.
"Learn every day, but especially from the experiences of others. It’s cheaper!” -- Jack Bogle
salvaje
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Re: Easiest way to establish a solo 401k?

Post by salvaje »

other than a backdoor Roth, any reason to keep a 401k if going solo vs changing to an IRA?
toddthebod
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Re: Easiest way to establish a solo 401k?

Post by toddthebod »

salvaje wrote: Fri Jan 13, 2023 1:03 pm other than a backdoor Roth, any reason to keep a 401k if going solo vs changing to an IRA?
Asset protection. A 401(k) is immune to creditors by Federal law, while an IRA is not always, depending on the state.
HomeStretch
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Re: Easiest way to establish a solo 401k?

Post by HomeStretch »

OP, Solo 401k plans are usually not covered by all the provisions of ERISA like a corporate employer 401k plan is covered. If asset protection is important to you, check the protections in your state for your employer 401k v. a Solo 401k and v. an IRA (which is not an ERISA plan).
salvaje
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Re: Easiest way to establish a solo 401k?

Post by salvaje »

toddthebod wrote: Fri Jan 13, 2023 1:17 pm
salvaje wrote: Fri Jan 13, 2023 1:03 pm other than a backdoor Roth, any reason to keep a 401k if going solo vs changing to an IRA?
Asset protection. A 401(k) is immune to creditors by Federal law, while an IRA is not always, depending on the state.
If I’m reading things correctly is “the possibility of a backdoor Roth” without added taxation another reason to use a solo 401K instead of an IRA?
salvaje
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Re: Easiest way to establish a solo 401k?

Post by salvaje »

toddthebod wrote: Fri Jan 13, 2023 1:17 pm
salvaje wrote: Fri Jan 13, 2023 1:03 pm other than a backdoor Roth, any reason to keep a 401k if going solo vs changing to an IRA?
Asset protection. A 401(k) is immune to creditors by Federal law, while an IRA is not always, depending on the state.
If I’m reading things correctly is “the possibility of a backdoor Roth” without added taxation another reason to use a solo 401K instead of an IRA?
toddthebod
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Re: Easiest way to establish a solo 401k?

Post by toddthebod »

salvaje wrote: Sat Jan 14, 2023 7:01 pm
toddthebod wrote: Fri Jan 13, 2023 1:17 pm
salvaje wrote: Fri Jan 13, 2023 1:03 pm other than a backdoor Roth, any reason to keep a 401k if going solo vs changing to an IRA?
Asset protection. A 401(k) is immune to creditors by Federal law, while an IRA is not always, depending on the state.
If I’m reading things correctly is “the possibility of a backdoor Roth” without added taxation another reason to use a solo 401K instead of an IRA?
I don't understand your question. You asked if, other than a backdoor Roth, is there a reason to keep a 401(k). I said, yeah, asset protection.

Now are you asking if other than asset protection, is a backdoor Roth a reason to keep a 401(k)?!
salvaje
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Re: Easiest way to establish a solo 401k?

Post by salvaje »

toddthebod wrote: Sat Jan 14, 2023 7:06 pm
salvaje wrote: Sat Jan 14, 2023 7:01 pm
toddthebod wrote: Fri Jan 13, 2023 1:17 pm
salvaje wrote: Fri Jan 13, 2023 1:03 pm other than a backdoor Roth, any reason to keep a 401k if going solo vs changing to an IRA?
Asset protection. A 401(k) is immune to creditors by Federal law, while an IRA is not always, depending on the state.
If I’m reading things correctly is “the possibility of a backdoor Roth” without added taxation another reason to use a solo 401K instead of an IRA?
I don't understand your question. You asked if, other than a backdoor Roth, is there a reason to keep a 401(k). I said, yeah, asset protection.

Now are you asking if other than asset protection, is a backdoor Roth a reason to keep a 401(k)?!
Apologies you’re totally right, I asked the same question twice and already received an answer. I’m just learning about the back door Roth and it didn’t quite register when I asked about the 401k/IRA question.
Finridge
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Re: Easiest way to establish a solo 401k?

Post by Finridge »

Both Fidelity and Vanguard provide solo 401k accounts. However only Vanguard allows for employee contributions to be treated as Roth contributions. Fidelity allows trad contributions only. (At both institutions, employer profit-sharing contributions are trad only.)
lakpr
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Re: Easiest way to establish a solo 401k?

Post by lakpr »

Finridge wrote: Thu Jan 26, 2023 1:41 pm Both Fidelity and Vanguard provide solo 401k accounts. However only Vanguard allows for employee contributions to be treated as Roth contributions. Fidelity allows trad contributions only. (At both institutions, employer profit-sharing contributions are trad only.)
+1 to this. Schwab and E*Trade are other providers that also allow Roth employEE contributions to their prototype Solo 401(k) plans.

If Roth contributions as employEE are a choice you want to retain, go with Vanguard / Schwab / E*Trade.

Edit: scratch out Schwab, see HomeStretch's post below.
Last edited by lakpr on Thu Jan 26, 2023 7:13 pm, edited 1 time in total.
HomeStretch
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Re: Easiest way to establish a solo 401k?

Post by HomeStretch »

lakpr wrote: Thu Jan 26, 2023 4:40 pm +1 to this. Schwab and E*Trade are other providers that also allow Roth employEE contributions to their prototype Solo 401(k) plans.

If Roth contributions as employEE are a choice you want to retain, go with Vanguard / Schwab / E*Trade.
I think Schwab’s Solo 401k Plan changed and no longer allows Roth elective deferrals.
lakpr
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Re: Easiest way to establish a solo 401k?

Post by lakpr »

Thanks HoneStretch, updated my prior post. Wasn't aware of that change.
earflop
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Re: Easiest way to establish a solo 401k?

Post by earflop »

HomeStretch wrote: Thu Jan 26, 2023 6:41 pm I think Schwab’s Solo 401k Plan changed and no longer allows Roth elective deferrals.
To my knowledge, Schwab never permitted Roth contributions to their template Solo 401(k) plan.

What I believe you are thinking of is TD Ameritrade. TDA used to allow Roth contributions, but recently eliminated them as a consequence of their (still in-progress) acquisition by Schwab.
KaskadeForever
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Re: Easiest way to establish a solo 401k?

Post by KaskadeForever »

Secure 2.0 now allows Roth contributions for a portion of SEP IRA contributions. I don’t know how long it will take for various brokerages to adopt that. That was preciously a benefit of 401k’s over SEP IRA’s, but apparently not anymore.
androiddd
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Re: Easiest way to establish a solo 401k?

Post by androiddd »

alexbogle wrote: Thu Jan 12, 2023 2:52 pm
My understanding is that I require self-employment income to be able to create the solo 401k. What is an easy way to earn such income that would allow me to open the solo 401k?

One thing I thought of was to do something like doordash every once in a while. Do I need to create an LLC? Just get a separate EIN? Will working for doordash allow me to open the solo 401k in a justifiable (to the IRS) way?
You don't need self-employment income to roll your company 401k to a solo 401k. Get an EID number, open it online or in person with Fidelity. You will need self-employment income to contribute to it though. You don't need an LLC. I have two 401k's, and only one of them get's contributions from my business, but the other stays open with some rolled over money.
androiddd
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Re: Easiest way to establish a solo 401k?

Post by androiddd »

vaylie wrote: Thu Jan 12, 2023 7:38 pm
Question: How much $$ do you have in your 401k that you want to roll over? Keep in mind that you have to file the 5500-EZ form if you have $250k+ and failing to file or filing late results in very very heavy penalties. Do a search in this forum to hear some horror stories. It's something to keep in mind, because you're saying that you want the *option* to do a backdoor Roth, not that you currently need to do it, right? So maybe it might be worth while to just keep things in a Rollover IRA until you get another job whose 401k might accept a rollover from an IRA.
The form 5500EZ is super easy to do online, (ETFTS website) and takes about 3 minutes. Wish the IRS made tax filing as easy! Just don't forget to do it!
SuzBanyan
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Re: Easiest way to establish a solo 401k?

Post by SuzBanyan »

androiddd wrote: Fri Jan 27, 2023 11:06 am
alexbogle wrote: Thu Jan 12, 2023 2:52 pm
My understanding is that I require self-employment income to be able to create the solo 401k. What is an easy way to earn such income that would allow me to open the solo 401k?

One thing I thought of was to do something like doordash every once in a while. Do I need to create an LLC? Just get a separate EIN? Will working for doordash allow me to open the solo 401k in a justifiable (to the IRS) way?
You don't need self-employment income to roll your company 401k to a solo 401k. Get an EID number, open it online or in person with Fidelity. You will need self-employment income to contribute to it though. You don't need an LLC. I have two 401k's, and only one of them get's contributions from my business, but the other stays open with some rolled over money.
The general consensus seems to be that self employment is need to open a Solo 401k but that if you have a Solo 401k from prior self employment, you can continue to roll funds into it. Also, the consensus is that an individual can only have a single Solo 401k, no matter how many business that individual owns by his/her-self and operates.

The penalty for violating the IRS rules is that contributions would not be deductible and that rollovers would be taxable distributions. Those consequences make many want to be very careful to adhere to the rules.
androiddd
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Re: Easiest way to establish a solo 401k?

Post by androiddd »

A quick google search shows:

1. If you intend to have self-employment income this year, even if a small amount, then you can certainly open a Solo-401k now. Nothing illegal about that.
2. You can have multiple 401ks, solo 401ks, etc. But the overall limits of contributions apply across all of them. Just be clear about the rules for reporting if the total is over 250,000.

But if your only purpose for the solo 401k is to do the backdoor roth, why not just leave the money in your company 401k? You can just leave it there, unless the investment options are very limited or expensive. As long as you don't have a traditional IRA, you can do the backdoor IRA.
toddthebod
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Re: Easiest way to establish a solo 401k?

Post by toddthebod »

androiddd wrote: Fri Jan 27, 2023 12:01 pm A quick google search shows:

1. If you intend to have self-employment income this year, even if a small amount, then you can certainly open a Solo-401k now. Nothing illegal about that.
2. You can have multiple 401ks, solo 401ks, etc. But the overall limits of contributions apply across all of them. Just be clear about the rules for reporting if the total is over 250,000.

But if your only purpose for the solo 401k is to do the backdoor roth, why not just leave the money in your company 401k? You can just leave it there, unless the investment options are very limited or expensive. As long as you don't have a traditional IRA, you can do the backdoor IRA.
The IRS effectively prohibits multiple solo 401(k)s by including this statement in their determination letters:
Our opinion doesn't apply for purposes of IRC Sections 415 and 416 if an employer maintains ... another qualified plan for one or more employees covered by this plan.
You can find that text in the IRS letters attached to Vanguard's, Schwab's, and Fidelity's basic plan documents. I assume anyone else offering a pre-approved solo 401(k) has the same line in their determination letter.
Topic Author
alexbogle
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Re: Easiest way to establish a solo 401k?

Post by alexbogle »

androiddd wrote: Fri Jan 27, 2023 11:06 am You don't need self-employment income to roll your company 401k to a solo 401k.
huh, this is interesting to learn. I'll have to do more research. Is the solo 401k basically independent of any specific business one has?

Thank you for sharing your knowledge.
"Learn every day, but especially from the experiences of others. It’s cheaper!” -- Jack Bogle
toddthebod
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Re: Easiest way to establish a solo 401k?

Post by toddthebod »

alexbogle wrote: Fri Jan 27, 2023 12:38 pm
androiddd wrote: Fri Jan 27, 2023 11:06 am You don't need self-employment income to roll your company 401k to a solo 401k.
huh, this is interesting to learn. I'll have to do more research. Is the solo 401k basically independent of any specific business one has?

Thank you for sharing your knowledge.
If you close a business, you cannot continue to maintain a plan. But you can't ever close your sole proprietorship, so if you do establish a plan under an LLC or something like that, you just need to amend the plan to have your sole proprietorship take over sponsorship when you close your LLC.
Finridge
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Re: Easiest way to establish a solo 401k?

Post by Finridge »

androiddd wrote: Fri Jan 27, 2023 11:06 am

You don't need self-employment income to roll your company 401k to a solo 401k. Get an EID number, open it online or in person with Fidelity. You will need self-employment income to contribute to it though. You don't need an LLC. I have two 401k's, and only one of them get's contributions from my business, but the other stays open with some rolled over money.
Fidelity does not provide Roth contributions to a Solo 401K. Vanguard does allow Roth contributions. I recommend establishing your Solo 401K at Vanguard and not at Fidelity for this reason.

(BTW, Fidelity does not require a sole proprietorship to have an EIN to open a Solo 401K. Vanguard does require one, but you can get it from the IRS in 15 minutes so it is not an obstacle.)
toddthebod
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Re: Easiest way to establish a solo 401k?

Post by toddthebod »

androiddd wrote: Fri Jan 27, 2023 12:01 pm A quick google search shows:

1. If you intend to have self-employment income this year, even if a small amount, then you can certainly open a Solo-401k now. Nothing illegal about that.
2. You can have multiple 401ks, solo 401ks, etc. But the overall limits of contributions apply across all of them. Just be clear about the rules for reporting if the total is over 250,000.

Internal Revenue Bulletin: 2017-29
An employer may not rely on an Opinion Letter for a Standardized Plan with respect to the requirements of §§ 415 and 416 without obtaining a determination letter if the employer maintains at any time, or has maintained at any time, another plan, including a Standardized Plan, that was qualified or determined to be qualified and that covers or covered some of the same participants. An employer that adopts a Standardized Plan that is a defined contribution plan will not be considered to have maintained another plan merely because the employer has maintained another defined contribution plan, provided such other plan has been terminated prior to the effective date of the Standardized Plan and no annual additions have been credited to the account of any participant under such other plan as of any date within a limitation year of the Standardized Plan.
Last edited by toddthebod on Thu Feb 02, 2023 7:58 pm, edited 1 time in total.
toddthebod
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Re: Easiest way to establish a solo 401k?

Post by toddthebod »

Finridge wrote: Thu Feb 02, 2023 7:43 pm
(BTW, Fidelity does not require a sole proprietorship to have an EIN to open a Solo 401K. Vanguard does require one, but you can get it from the IRS in 15 minutes so it is not an obstacle.)
You need an EIN to file form 5500EZ.
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