≡ Menu

How I Accumulated $75,000 in My 401k in Just 2 Years

{ 23 comments }

How I accumulated $75,000 in my 401k in just 2 yearsWhen 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. I made much less income than previously, but we only need a small portion of that income to fund our lifestyle. Mrs. RB40 is still working full time and her paychecks pay the bills. As a result, I can put a sizeable portion of my self-employment income into a retirement account. It turns out that I’m saving more than ever because now I could take advantage of the individual 401k. That’s how I accumulated $75,000 in my 401k in just 2 years.

I’m sure most of you are familiar with the employer sponsored 401k plan. Most employers offer this plan and I think everyone should take advantage of it. 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 individual 401k (aka. solo 401k) is a little different than the regular 401k. This plan is only available if you’re self-employed with no employees (or just the spouse.) As an employee, you can contribute up to $18,000, the standard 401k limit. In addition, as the employer, you can contribute up to 25% of your earned income. You can add another $5,500 if you’re at least 50. The total contribution limit is $53,000 in 2015.

For 2015, I’ll make around $36,000 from self employment. I’ll be able to contribute up to $18,000 in employee salary deferral and up to $9,000 in employer contribution. That’s $27,000 I can shelter from Uncle Sam this year. I only have to pay tax on just 25% of my income!

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 small business’ i401k account. That’s what I should have done in my final year of working full time. Let’s take a look at my i401k account.

My i401k

Here is the breakdown from Vanguard.

Nov 01,2013 – Nov 03, 2015 (That’s 2 years, but it’s really 3 years because it’s 2013, 2014, and 2015.)

Beginning balance                 $0

Purchases                                  $66,641.30

Investment returns               $7,835.19

Ending balance                       $74,476.49

Rate of return                            7.8% (?)

The entire fund in this i401k account is invested in VTSMX, Vanguard Total Stock Market Index Fund Investor Share. Unfortunately, I can’t invest in Admiral shares in the i401k account. The expense ratio is still very low at 0.17% so it’s not so bad. The i401k account maintenance fee is $20 per year. Here is the chart.

Vanguard solo 401k

Contribution

Contributing to the i401k takes a little more work than a regular 401k account. With the regular 401k account, your employer will automatically deduct your contribution, but contributing to the i401k at Vanguard is manual. I need to log on to Vanguard at the beginning of every month and pull $1,500 from our checking account. Occasionally, I contribute a bigger chunk and classify it as “employer contribution.” For example, I contributed $2,000 extra in August when the market was down. I wish I could have added more, but we are a bit low on cash this year. You can see those occasional bumps on the chart. I added $17,500 in one big chunk when I opened the account in November, 2013.

Performance

I’m not sure why the rate of return is 7.8%. It should just be the ending balance divided by money invested, right? That would be around 12% according to my calculation. I will call Vanguard and see how they arrived at 7.8% ROI. In any case, the i401k worked out pretty well for me. I was able to accumulate $74,476 in just 3 years of self employment.

The solo 401k is great for the self employed

If you have any self employment income, you should consider a solo 401k account. It’s a great way to save more for retirement and pay less tax now. It’s pretty amazing how much I’ve saved up in just 2 years. I should be able to keep putting away a large portion of my self-employment income until Mrs. RB40 retires in 2020. Once she quits working, then I’d probably have to stop contributing to my i401k account. We’ll need all of my online income to fund our early retirement at that point.

Are you saving in your 401k? If you have any self employment income, you should research the i401k plan.

If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.

Image credit: by arbyreed

The following two tabs change content below.
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, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also 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 DIY investors analyze their portfolio and plan for retirement.

Latest posts by retirebyforty (see all)

Get update via email:
Sign up to receive new articles via email
We hate spam just as much as you
{ 23 comments… add one }
  • Nick November 18, 2015, 11:24 am

    Can you roll rental property income into a 401k? I would love to take my rent checks and apply them to this? Thoughts?

    • retirebyforty November 18, 2015, 9:57 pm

      I’m pretty sure you can not do that. The i401k is only for earned income.

  • Bryan @ Just One More Year November 9, 2015, 8:48 am

    Way to go with maxing out these tax friendly plans! That is what I really appreciate about the PF community, learning new hacks every day.

    I will have to check into the i401K plan myself.

  • Tre November 8, 2015, 4:05 am

    I have to admit, I never thought of starting a i401k with my side income. That is something I will have to look into for 2016.

  • Harlan V. November 7, 2015, 8:18 pm

    Amazing info. I recently signed up for Fidelity’s version of this and can’t WAIT to max it out. Very inspiring.

    Thank you!

    • retirebyforty November 7, 2015, 10:31 pm

      I heard Fidelity is a great option too. You can get the Spartan funds and I don’t think they have any fee for the i401k account. Let me know what you think about the Fidelity plan.

  • nicoleandmaggie November 6, 2015, 8:34 pm

    That’s pretty cool. Right now I’m maxing out my required retirement (12% of my income), my additional 403b (18000), and my 457 (18000). I make too much for a regular IRA. I usually bring in a couple thousand in random earned income, give or take, but it would probably make more sense to figure out the backdoor Roth (or to increase DH’s contributions to his high-fee 401k beyond the match) than to set up a separate account for side-income if we wanted to save more for retirement. But it is good to know that’s an option.

  • Route To Retire November 6, 2015, 1:22 pm

    That’s really cool! I never really thought too much about saving more in retirement once I quit the day job, but if you’re continuing to bring in additional income, that makes perfect sense. I hope to be in a position like yours when we get there!

    — Jim

  • Cutty01 November 6, 2015, 9:12 am

    Joe please confirm – If you have a self employed business in addition to your W2 job, I believe you are still restricted by the $18,000 IRS limit (+$6,000 for 50 and over) for employee contributions. That means that your employee contributions from both your W2 job and your side business can only add up to $18,000/year.

    However the strategy would be to increase the company matching from each source of contribution. First you contribute the maximum amount to your W2 401k plan so you get the maximum company matching (usually 3 to 6% of your contributions). Then you make contributions to your self employed business’s 401k plan for the remainder amount to get you to the $18,000 limit. However since your side business can match up to 25% of your payroll, you can possibly get a higher company match than if you were just to use your W2 401k plan.

    I welcome any comments to validate or are different from my understanding.

    • retirebyforty November 6, 2015, 10:55 am

      Yes, the total employee contribution is still $18,000 per year.

      For your side business, you don’t have to match. You can just contribute up to 25% of your income. So you can max out the $18,000 at your day job. Then contribute 25% of your self employment income as employer contribution in the i401k.
      See the examples at the end of the IRS page here. (Thanks Cutty01 above.)

  • Mr. Benny @ Stuff That Pig November 6, 2015, 8:36 am

    This is fantastic! I’m planning on going full 1099 next year so had been doing extensive retirement plan research but didn’t realize that my side hustle income from this year could fund a solo 401(k) as well. I did some digging and for the folks that have a current 401(k) [like me], the max employee contributions of $18k for 2015 are per employee. The employer match contributions (from unrelated businesses) are completely separate. The IRS says here https://goo.gl/SRtNj8 that you can contribute $18k to Big Corporation plan and then if you have enough profit from your side hustle, contribute $53k to your solo 401(k) as profit sharing. Plus the Big Corporation could match your contributions as well. I would love to find a corporation where during salary negotiations I could say “I want to be a W-2 employee but instead of you paying me $30k more, I want you to match my $18k 401(k) contribution 2:1. I put in $18k, you top it up to $53k. We can take 193% of the excess contribution off the salary number. 🙂 ”

    JC is spot on with his Rate of Return comment. It’s always confusing the first year or two. I usually just ignore rate of return since it doesn’t matter to my investment strategy.

    Great job on removing assets from the taxable income stream!

    • retirebyforty November 6, 2015, 10:50 am

      Good luck next year. You definitely should check out the i401k. It’s a great way to defer your tax.

  • SavvyFinancialLatina November 6, 2015, 7:01 am

    Thanks for sharing! Seems to me the i401K is a great option! I continue to max out my 401K. I wish I had started maxing it at the beginning of my career when I was 22. It took me about a year to figure it out, and then I increased my contribution to the max. Any college graduate out there, start maxing out the 401k from the beginning. Instead of giving the government more taxes, I let the money grow in my 401K.

    • retirebyforty November 6, 2015, 10:48 am

      You should consider opening an i401k account. I think you’re making self employment income now, right? You’ll be able to save more and save on tax. Good luck!

  • Nicki November 6, 2015, 6:56 am

    Hi Joe–Great article. One question—I thought as a self employed person you had to use a SEP IRA and the max was 25% of your gross profit–for us that would max at $2500 for the year–yet you put in a lot more with the 401k. Are you familiar with SEP IRAs, if so—how do you use a 401k rather than SEP, being self-employed? Appreciate your answer!

    • Ndy November 6, 2015, 7:48 am

      Hi Nicki, as a self-employed individual, you can either use SEP-IRA or i401K. Both may be similar but the i401K is superior b/c you can potentially put in a lot more money than with the SEP-IRA b/c the latter limits you to only 25% of your gross profit, but with the i401K you get to add the employee contributions (18K max for 2015) assuming you don’t have any other 401K at your regular work, and you also put in the employer contribution which is the 25% of your gross profit as with the SEP-IRA. The i401K is also superior in that it’s a lot easier to do a Backdoor Roth IRA assuming you make too much for a regular Roth contribution, compared to having a SEP-IRA which complicates making a Backdoor Roth contribution.

      • retirebyforty November 6, 2015, 10:47 am

        Yes, Ndy is correct. You can save a lot more with the i401k due to the employee contribution.

  • Chuck November 6, 2015, 5:49 am

    Very interesting. I learned something new today. Had no idea you could run an i401k if you are still a full-time employee and also generating independent income.

    I just got started on my journey earlier in the year, but I hope to be financially independent in 5 years.

    Thanks for the inspiration!

    • retirebyforty November 6, 2015, 10:46 am

      Good luck on your journey. 🙂

  • JC @ Passive-Income-Pursuit November 6, 2015, 3:42 am

    That’s awesome that you’ve been able to build up over $75k in two years in the individual 401k and even better for those that are side hustling while currently employed is that you can contribute to both an employer sponsored as well as individual 401k. That’s a great tip to help shelter more income from taxes. For whatever reason I’ve been on a tax optimization kick lately and I’m working through some different scenarios for both this year and next year. Is there any specific classification that your self-employment income has to come from? Mainly, is sole proprietor allowed? I’m assuming yes because that’s likely what you are using. I don’t know if I’ll be able to set one up this year because cash is kind of tight right now but it’s definitely something to keep in mind for next year because I expect to be able to bump up my own side hustle income.

    The rate of return they use is the internal rate of return that accounts for the timing of the cash flows. Your ROI would be ~12% but your IRR is different. You can use the XIRR function in Excel/Google Spreadsheets to calculate your IRR.

    • retirebyforty November 6, 2015, 10:46 am

      Yes, sole proprietor is allowed. Although, the limit might drop to 20% if you are unincorporated. I think you need to be incorporated (LLC) to contribute 25%. Call Vanguard or Fidelity to see about opening an i401k. Thanks for the info on the IRR. I will read up on it.

  • Hannah November 6, 2015, 2:26 am

    I’m wondering if Rate of Return is the compound Annual Growth rate, rather than just total return. Otherwise, people who have been investing a decade would think their hot shit with 82% returns.

    • retirebyforty November 6, 2015, 10:43 am

      That’s what I was thinking. 7.8% annual growth is great, but that doesn’t sound accurate either…

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.