When I left my engineering career to become a stay at home dad/blogger, I wasn’t sure if I could continue to save for retirement. My original plan was to use my small blog income to help fund our expenses. That way I could put off withdrawal from my nest egg and let it grow undisturbed. However, life rarely turns out as planned. In my case, the last five years of early retirement has been much better than expected. Mrs. RB40 is still working full time and her income increased significantly since I retired early. My blog income also grew from $10,000 per year in 2011 to $65,000 in 2017. These two factors mean we can fund our cost of living expenses with Mrs. RB40’s income and I can max out my retirement account. Today, we’ll take a look at my Solo 401k and the amazing growth it went through.
I’m sure most of you are familiar with the employer sponsored 401k. Almost every employer offers this plan which everyone should take advantage of. It’s one of the easiest ways to save for retirement. You will be very well off in retirement if you always max out your 401k. The Solo 401k is similar to your regular 401k, but it’s only for self employed people. Let me tell you more about this plan.
The Solo 401k (aka individual 401k) is only available if you’re self-employed with no employees or just the spouse. As an employee, I can contribute up to $18,500 to the plan, the standard 401k limit. In addition, as the employer, I can contribute up to 25% of the income. Folks older than 50 can add $6,000 more as catch up contributions. The total contribution for the Solo 401k can’t exceed $55,000 in 2018.
It’s even better if you have a full time job and a small business on the side. You can contribute to your employer sponsored 401k and also contribute to your i401k account on the side. That’s what I should have done during my final year of working full time to reduce our taxes.
In 2017, I made $65,388 from blogging and my maximum contribution was $31,153.70. I contributed $18,000 as an employee and $13,150 as the employer. This added up to $31,150 of tax deduction. We needed as much tax deduction as possible because our tax liability was much higher than expected. Now, let’s take a look at how my Solo 401k is doing.
I used Vanguard’s Solo 401k calculator to figure out my maximum contribution. It’s a good calculator that takes self employment tax into account. Check it out if you’re self employed.
My Solo 401k
The Solo 401k is really great because I was able to save more than I ever did as an employee. Here are my contributions over the years.
|2018||$6,000 in Q1|
That’s a lot of money stuffed into a retirement account in five years. I’ve been very lucky so far because the stock market did so well since I started investing in my Solo 401k. Now, the balance has grown to over $175,000. Here is the graph from Vanguard.
The green area is where I contributed since 2013. For the most part, I consistently add a fixed amount every month. The amount is the employee maximum contributions divide by 12. That’s dollar cost averaging at work. Also, I add the employer contribution after I finished our taxes. You can see a bigger contribution around every New Year. The best example is in 2018. I contributed about $13,000 over the last few months to take advantage of the 10% stock market correction.
The blue area shows the investment returns. It’s very encouraging to see the returns increasing. Now that the amount in my Solo 401k is beefier, the investment returns is also picking up steam. It’d be awesome to see the blue area outpacing the green someday. I’ll update this post every year so we can see how it grows. Let’s see what happens in 5 years.
Investing with Vanguard
I wrote a more detailed post about Vanguard’s Solo 401k plan a while back. You can read more there if you are considering working with them. My experience has been largely positive. I’ll give a quick summary of that post here.
- Cost – $20 per year for each Vanguard fund held in the Solo 401k account. This fee is waived if you have more than $50,000 invested in Vanguard funds.
- Investment choices – More than 100 Vanguard mutual funds. However, we can’t invest in ETFs or the Admiral shares (lower fees.) It’s just their rule.
- Roth option – Vanguard is one of the few companies to offer Roth 401k. I’m going with the traditional 401k for now because we need the tax deduction.
- No Loan– You can’t borrow from your i401k account at Vanguard. This isn’t a big deal to me because I don’t plan to borrow anyway.
- IRS– You will have to file form 5500 EZ with the IRS if the i401k plan asset is over $250,000. See the IRS page on form 5500 for reference. This is the rule no matter where you have the Solo 401k.
More paperwork, great. I don’t have to file the 5500 form yet, but that day is coming up soon. I guess I can’t complain because it means my retirement savings is kicking some serious butt.
Anyway, I used to have just one fund in my Solo 401k because I didn’t want to pay the $20 per fund fee. It was VTSMX. Now I have 4 funds so I can diversify a bit. The value of my Solo 401k is over $50,000 so they don’t charge me the $20 per fund fee anymore.
- VTSMX – Vanguard Total Stock Market Index Fund
- VGTSX – Vanguard Total International Stock Index Fund
- VBMFX – Vanguard Total Bond Market Index Fund
- VMFXX – Vanguard Federal Money Market Fund
All in all, I’m pretty happy with Vanguard. The only problem is the inability to invest in their Admiral Shares. Their investor fund has low fees (expense ratio), but lower would be better. Once the amount is large enough, even 0.1% difference in fees adds up. If I can invest in the Admiral funds, I’d pay $70/year in fees instead of $263. That’s not a huge difference, but it will add up over time. The price tag will increase every year as my Solo 401k grows.
I’m not sure why they don’t let you invest in the Admiral funds with the Solo 401k. I guess Vanguard has to make money too. Maybe I can roll this Solo 401k into my traditional IRA periodically. I’ll check with them.
Lastly, I’d like to remind you to check your asset allocation at least once per year. The stock market did so well in 2017 and your asset allocation might be out of balance if you haven’t checked in a while.
I maintain a spreadsheet to keep track of my net worth and asset allocation, but I don’t update it very frequently. It’s easier to login to Personal Capital to get a quick glance on my asset allocation.
Personal Capital takes all our accounts and calculates the asset allocation. It’s a quick way to check your asset allocation. Sign up with Personal Capital if you don’t have an account yet. They also have a very good retirement planner/calculator and other useful tools. I highly recommend them for DIY investors.
Are you self-employed? If so, are you saving for retirement? It’s difficult to save for retirement if your income is unstable, but you need to plan for the future. The Solo 401k is a great retirement saving vehicle.
Image credit: Mabel Amber via Pexels
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.