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. 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.
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
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.
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.
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.
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Image credit: by arbyreed
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