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Saving More for Retirement in My Solo 401k

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Saving More for Retirement in My Solo 401kWhen 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.

Self-employment savings

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.

Tax Year Contributions
2013 $23,500
2014 $26,000
2015 $24,500
2016 $22,500
2017 $30,150
2018 $6,000 in Q1
Total $132,650

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.

Solo 401k balance

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.

  1. VTSMX – Vanguard Total Stock Market Index Fund
  2. VGTSX – Vanguard Total International Stock Index Fund
  3. VBMFX – Vanguard Total Bond Market Index Fund
  4. 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.

Rebalance periodically

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 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

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

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.
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{ 43 comments… add one }
  • Ernie Zelinski March 19, 2018, 1:59 am

    Yes, I am self-employed. I have been saving for retirement many years. In Canada, self-employed individuals can place money in RRSPs and get a tax deduction for the contributions they make to a RRSP the year they make the contribution. In 2015 I put $24,930 in my RRSP. In retrospect, that was a real stupid move. The problem is that the highest tax rate in Alberta was 39 percent in 2015. But in 2016 due to new governments federally and provincially the maximum tax rate went up to 48 percent. So if I took out the money today that I placed in RRSPs in 2015 (at a tax savings of 39 percent), it would be taxed at 48 percent. Not so good. Bottom line: Never trust governments. They are full of swindlers, particularly socialist governments. No wonder there is a Russian saying that if a socialist republic was established in the Sahara Desert, it would take only two or three years before they ran out of sand. Also, what did the Soviet Socialists use before they started using candles? The answer is electricity.

    • Chris Urbaniak @ deliberatechange.ca March 19, 2018, 3:10 am

      “if a socialist republic was established in the Sahara Desert, it would take only two or three years before they ran out of sand.”

      LOL. What a great laugh to start my day. Thanks for sharing, Ernie 🙂

    • retirebyforty March 19, 2018, 9:05 am

      Ouch, that bites. The US tax bracket is pretty good right now. I hope it doesn’t increase too much by the time I’m 65.
      Funny stuff about the socialist system. At least, you guys have healthcare…

  • [email protected] March 19, 2018, 2:51 am

    I’m an employee full time and don’t have any blog income yet. Being able to set up some new tax deductible contributions is so exciting to me. I’d much rather put extra money in a 401(k) than a brokerage account. Great post! It’s always fun and motivating to read about the benefits of self employment.

    • retirebyforty March 19, 2018, 9:06 am

      Good luck with your side project. The Solo 401k is a great way to shelter self employment income.

  • Lily | The Frugal Gene March 19, 2018, 3:02 am

    Ohh yes, after the roth, next up is to move money into the solo 401k account. It’s very useful and makes self employment a little more financially rewarding

    • retirebyforty March 19, 2018, 9:07 am

      Nice. You can shelter some of that Airbnb income. That’s earned income, right?

  • Chris Urbaniak @ deliberatechange.ca March 19, 2018, 3:08 am

    Good morning, Joe.

    Nice walk-through on the retirements savings. Isn’t it awesome to see how net worth can increase after FIRE’ing?

    I’m not there yet, but I have a friend who FIRE’d last year at age 24. He was able to then pour his time and energy into the things that were of interest to him (namely his family and his business), which resulted in a substantial net worth growth as well.

    I think so often we think that we are always further ahead by staying on payroll, but that is a bad assumption to make without first thinking it through. For some people, the answer will be yes; for others, clearly no.

    • retirebyforty March 19, 2018, 9:08 am

      The last 5 years was amazing. The stock market growth boosted our net worth quite a bit. It’s going to be more difficult the next 5 years, but I’m still optimistic. We don’t have to withdraw for 10-15 years so let it ride.

  • Tom @ Dividends Diversify March 19, 2018, 5:21 am

    Hi Joe, I have never been in a position to take advantage of the solo 401k. However, it does offer some great advantages as you have outlined. Tom

  • Brad - Financial Life Planning March 19, 2018, 5:46 am

    A SEP IRA is another good option to consider for self-employed people. I’ve been able to stash $50k+ in certain past years using the SEP option. People need to consider their specific situations to see which might be the better option for them.

    • retirebyforty March 19, 2018, 9:11 am

      Wow, that’s a lot of savings. I bet your retirement fund grew quite a bit over the last few years.
      I think you can add more to Solo 401k. I considered SEP IRA in 2013, but the Solo 401k was a better fit since I’m a solopreneur.

  • Ms. Frugal Asian Finance March 19, 2018, 5:57 am

    Wow having an employer-sponsored 401k and solo 401k sounds awesome! The solo 401k sounds even better. I guess that’s the perk of running your own business and working hard to make things happen!

    I have heard about the solo 401k here and there but haven’t seen any analysis as thorough, straightforward, and illustrative as yours. Thanks for sharing, Joe! 🙂

    • retirebyforty March 19, 2018, 9:12 am

      The nice thing about the employer sponsored 401k is they usually have some kind of matching program. That’s free money.
      The Solo 401k is great because you can save more, but that come from your income. No free lunch. 🙂

  • Olivia March 19, 2018, 6:03 am

    I agree! If you have a normal “corporate” job and a side hustle, you can even stash away up to $109k (I think that’s this year’s limit) if you have a SEP IRA + 401k (at corporate). If you just have i401ks and 401ks thought, you’re limited to the $54.5k total.

    The tax advantages of side hustles are awesome :D.

    • retirebyforty March 19, 2018, 9:14 am

      I didn’t know that. That sounds like a great option. I will check it out if I ever get a real job again. 🙂

  • Angela @ Tread Lightly Retire Early March 19, 2018, 6:11 am

    I’d say based on the last five years, you stuck around at your engineering career a bit too long 😉 The beauty of an awesome side hustle that ends up bringing in more income than many do at their full time jobs.

    • retirebyforty March 19, 2018, 9:15 am

      Financially, I’m not so sure. I would have made money as an engineer and saved more. However, I’d be really stressed out and our family wouldn’t work as well. Anyway, I’m happy I quit when I did. It worked out.

  • Dave in Sunny FL March 19, 2018, 7:21 am

    Choosing a non-Roth option for the sake of a tax-deduction seems like a bad call, long-term. The returns you show on your account are inflated by the amount that the government has a claim on. The pace at which you tap the account in the future (especially after 70 1/2, when the withdrawals become mandatory) may result in higher income, subjecting your Social Security benefits to additional taxation. No one knows what tax rates will be in the future, but they seem more likely to go higher, than to go lower. Think about it like a farmer: you would rather pay tax on the value of your seed, than on the value of your finished crops. A Roth account has so much more flexibility, including the withdrawal of contributions without penalty or taxation, allowing it to serve as a source of emergency funds.

    • retirebyforty March 19, 2018, 9:18 am

      Good point. It’s a tough call. I think we’ll be okay as long as there is a Roth conversion option. Once Mrs. RB40 retires, we’ll start converting some 401k to Roth IRA. For us, we have a long time to do the conversion.
      Going with the Roth option is probably better for young people in their 20s and 30s who plan to retire at the traditional age.

  • Mrs. Groovy March 19, 2018, 8:05 am

    I only recently learned about the solo 401k and how easy it is to set one up. If I were pursuing income I’d set one up immediately. Congrats on that $30K you added in 2017!

    • retirebyforty March 19, 2018, 9:19 am

      Thanks! If I can do this for 5 more years, we’d bet set. 😉

  • Smile If You Dare March 19, 2018, 8:54 am

    Yes! Solo 401K is great!
    When self-employed, being both the employer and the employee, I can contribute much more than if I was an employee in some corporate job.

    SEP IRA is also a good strategy for self-employed. There are differences though. No catch-up contributions in SEP.

    Any way you cut it, saving and investing for the future is a good thing. Don’t put it off!

  • FullTimeFinance March 19, 2018, 9:23 am

    We love my wife’s solo 401k. We’re only in year two so it’s pretty small. We went with schwab. It doesn’t seem like you can lose with any of the big three.

  • Financial Panther March 19, 2018, 12:13 pm

    The solo 401k is the bonus retirement account for side hustlers! I always like to point out to people that it’s a tax-advantaged account that even the most highly paid employee doesn’t get to have. Meanwhile, a lowly Postmates delivery man like myself can put my money away into this sweet account.

    I personally go with Fidelity because they allow rollovers, which Vanguard, weirdly does not. For high earning individuals, this can be really good, because if you’re trying to do backdoor Roths, you can always just roll over any IRA contributions into a solo 401k like Fidelity.

    • retirebyforty March 19, 2018, 9:33 pm

      Thanks for the input. I recently found out that Vanguard doesn’t allow rollover into their solo 401k. That’s fine with me because I didn’t want to roll over. I have my traditional IRA in another account at Vanguard. I can rollover part of that into Roth when I need to do some conversion.

  • Working Optional March 19, 2018, 3:41 pm

    Yep – Vanguard doesn’t open up Individual 401(K)s to Admiral shares because they need to make money / cover their expenses. They’d basically make up those fees somehow i.e. maybe by increasing their expense ratios by 0.01% everywhere.

    They also don’t let you roll over to an IRA while the 401(K) and the business associated with it is operational – last I checked, which was a few years ago. That said, if you have better luck with them let me know.

    Lastly, one caveat about rolling it over to a Trad. IRA is that it makes the Backdoor Roth a little trickier …

    • retirebyforty March 19, 2018, 9:35 pm

      Thanks for the info. I’ll give them a call and ask about rolling over. There must be a mechanism to shut it down somehow. Worst come to worst, I can move it to Fidelity. They seems more flexible.

  • Accidental FIRE March 19, 2018, 4:41 pm

    Congrats on your continued success Joe! I hope to one day have enough income from my side hustles to do this but I have a long way to go

  • FIRECracker March 19, 2018, 5:41 pm

    This is why I laugh whenever people say “but but but, you might run out of money in retirement and never find a job again.” So many people end up following their passions after FIRE and get unexpected earnings, the idea that you’ll never make a single cent again is pretty laughable.

    Thanks for sharing all your numbers and details about your Solo 401K! Pretty soon you’ll have enough income to retire all over again 😉

    • retirebyforty March 19, 2018, 9:38 pm

      Yeah, it’s pretty amazing. The last five years had been really good, though. I need to go through a recession before I can put my mind at ease. It’ll be harder to make money with side hustle when the economy is down.

  • RBD March 19, 2018, 6:16 pm

    The solo 401k is one account I feel like I’m not taking advantage of now that I have some side income. Good to see how you’ve implemented it. Mrs. RBD is starting to get on my case about investing too much in retirement accounts though. I guess that means I’m doing things right, keeping the money protected!
    -RBD

    • retirebyforty March 19, 2018, 9:39 pm

      Having too much in the retirement accounts is way better than having too little. 🙂
      Nice job!

  • Lazy Man and Money March 20, 2018, 4:26 am

    I’ve had a solo 401k for years, but I haven’t been able to pay myself first due to expenses.

    We spend on education which seems to just be a bubble waiting to pop. We got hit with 3 major condo assessments in the last 3 years. I’ve also spent 5 digits (that start with a crooked number) on legal expenses related to writing about multi-level marketing scams.

    • retirebyforty March 21, 2018, 8:54 am

      That’s why I don’t like condos anymore. You have no control over the repair.
      You have repair and maintenance with a house too, of course. But it just feels like you have more control.
      Sorry to hear about the continuing MLM issue. That’s dragging on and on.

      • Lazy Man and Money March 22, 2018, 5:53 am

        The thing I do like about condos is that I don’t have to worry about landscaping, snow removal, painting, roof repair, etc. I know I’m paying for all this stuff in the condo fee, but it’s one less thing that we have to actively manage.

  • Dave @ Married with Money March 20, 2018, 9:05 am

    Nice! I didn’t know you could have both an individual and employer sponsored 401k at the same time. Idk why I didn’t know that. Learn something new every day!

  • Kayla Sloan March 20, 2018, 9:07 am

    Looks like you are doing all you can to continue to achieve your financial goals. Investing for the future is an important part of that. Thanks for sharing.

  • Dividend Diplomats March 20, 2018, 8:08 pm

    RB40 –

    Great article and believe it sheds the light on what you can do if you are self-employed/have your own company. Plus – you are showing the benefits too and another plus – those funds you invest in – pay some pretty nice dividends : )

    -Lanny

  • GYM March 20, 2018, 10:26 pm

    Good to read about solo 401K, all this stuff is new to me since I am from Canada 🙂

    Thanks for sharing- what percentage of International is Canada? I am convinced that Canadians have too much Canada in their portfolios lol! 🙂

  • Allen March 21, 2018, 2:51 pm

    So, if I start my own blog, I am the employee and the employer?

    • retirebyforty March 21, 2018, 3:14 pm

      As far as the 401(k) goes, you’re both the employer and the employee. Well, the business is the employer, but you own the business.

  • Allen March 21, 2018, 4:41 pm

    Thanks!

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