Saving for retirement is a big problem in the United States. Many retirees have no savings at all and they will have to keep working to pay the bills. Social Security helps, but that isn’t enough for most people. It’s a tough situation to find yourself in at that age. My retirement saving is in good shape compared to most people, but I still worry. You never know if you will be able to work or find a good job when you’re older. When it comes to retirement savings, having extra is better than not enough. That’s why I’m still saving more in my 401k.
When I retired from my engineering career in 2012 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 we could put off withdrawal and let our retirement savings grow. However, life rarely turns out as planned. In my case, that’s a good thing. The last seven 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. Amazingly, my blog income also grew from $10,000 per year in 2011 to $75,000 in 2018. It’s simple, our income exceeds our living expense so I continue to save. Today, we’ll take a look at my solo 401k and how it did over the last few years.
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.
*Updated 05/08/2019
Self-employment savings
The solo 401k (aka individual 401k) is only available if you’re self-employed with no employees or just the spouse. My goal is to contribute as much as possible to my solo 401k. The more I contribute the less tax I have to pay. You only pay tax on the traditional retirement account when you make a withdrawal. Here is how much you can contribute to the solo 401k in 2019.
- As an employee, I can contribute up to the standard 401k limit. The 2019 maximum contribution is $19,000. If you’re 50 or older, you can add $6,000 catch-up contribution limits.
- As an employer, I can contribute up to 25% of my “net earnings from self-employment.”
These two components add up to a significant amount. However, the total contribution can’t exceed $56,000 in 2019.
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 2018, I made $74,597 from blogging and my contribution limit was $36,649. I contributed $18,500 as an employee and $18,000 as the employer. That’s $36,500 of tax deduction. We needed as much tax deduction as possible because Mrs. RB40 still works full-time. I don’t want to pay more taxes than necessary. Now, let’s take a look at how my solo 401k is doing.
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 | $36,500 |
| 2019 | $7,000 by 5/1/19 |
| Total contribution | $170,150 |
That’s a lot of money stuffed into a retirement account in 6 years. I’ve been very lucky so far because the stock market did quite well since I started investing in my solo 401k. Now, the balance has grown to nearly $200,000. 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 periodically.
The blue area shows the investment returns. 2018 started off really well, but we had a rough Q4. My account got hit pretty hard because I had a significant percentage in the emerging market. We’re doing a bit better in 2019.
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. Previously, we couldn’t invest in the Admiral shares, but this rule changed in 2018. Now I can have Admiral shares in my account. That’s great!
- 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 5500for reference. This is the rule no matter where you have the solo 401k. Unbelievably, we’re getting close to $250,000. I might have to file this form soon.
In 2018, I had 4 funds in my solo 401k. 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
This year, I moved a big chunk into the money market fund. I’m just very nervous about the stock market. Now, I only have two funds.
- VMFXX – Money market fund. 90%
- VTSAX – US total stock market fund, Admiral Shares. 10%
All in all, I’m pretty happy with Vanguard. The solo 401k plan improved immensely this year when they let us invest in Admiral Shares. I’m being very conservative right now. I plan to move the money back into the stock market at some point, but I’m not quite ready yet.
Rebalance periodically
Lastly, I’d like to remind you to check your asset allocation at least once per year. The stock market did very well so far in 2019 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 investment, but I don’t update it very frequently. It’s easier to log in 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.
Disclosure: We may receive a referral fee if you sign up with a service through the links on this page.
Image credit: Mabel Amber via Pexels
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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Nice! I’m thinking of a solo 401k now that my side hustle is beginning to pick up. Your article came in at the right time.
Go for it. It’s a great way to minimize taxes.
Wow, so impressive $10,000 in 2011 to $75,000 in 2018- so much growth in 7 years!
I wonder what the Canadian equivalent of the solo 401K is
It’s up and down. We’ll be closer to $40,000 this year.
Wow! Nice job saving in your solo 401k! I’m a bit nervous about the market too, but 90% in stable money market? I guess if I was early retired I might be a bit more conservative and have the perspective of capital preservation, but to me that sounds a bit too conservative. 🙂
Thanks! I have 90% in money market because I don’t want to touch my wife’s account.
Overall, it’s about 60/40. 🙂
Yeah, a solo 401k is a very good idea. If I ever make any money from my side hustles like you do, I plan to establish one.
FYI: You’re doing really good Joe! Congrats to you! 🙂
Your side hustle doesn’t need to generate any income for you to open a solo 401k.
I’m self-employed, but I have a SEP-IRA. Which is fine with me because I’ll have trouble enough maxing that out (about $14,500), so there’s no way I can max out a solo 401(k). But if I ever magically get to the point where I can more than max out the SEP, I’ll consider getting a 401(k) instead.
For now, I’m just thrilled that I (finally) got my act together and started the SEP. Now it’s just a matter of funding the sucker as much as possible.
OK but then it’s trapped there until you’re 60. Never really wanted that and never considered anything on 401k as part of my networth. It’s government money, a big chunk anyway !
You can move some money over to the Roth IRA a bit at a time. Build a Roth IRA ladder to access the 401k without having to pay the early withdrawal penalty. You can also borrow from it or use the rule of 72 to withdraw. There are quite a few ways to get your money out.
Gasp!! Are you trying to…TIME THE MARKET?! Moving your investments into a money market fund is a very risk averse move! Must I remind you that we do not time the market?! Okay, rant over…I feel a little more relieved that I am not the only one who is being more cautious with the current market. All savings outside of my 401k is currently kept in savings accounts because I am worried about the current state of affairs. I have yet to decide if I will move my 401K money outside of VHDYX and into a money market. If only I had a crystal ball…
Employer matches towards a solo 401k are 25% not 20%.
Hi Joe! Hmm, interesting point about being able to contribute to an IRA as an employee and an employer within the limits. What if your blog didn’t earn revenue? You are still an employee, but are you in you didn’t file a 941 earning report? That seems like a gray area, and one that I would have to research. My blog doesn’t earn revenue and I don’t know if it ever will. Great article as always. ~smile~ Roseanne
It’s NOT a gray area at all. Any money put into an IRA or 401K HAS to be earned income. If your business isn’t earning income than you have nothing to put in these accounts. It makes no difference if you intend to earn money or not. All that matters is if you do.
this is great information. mrs. smidlap was working for herself for a portion of ’18 but not really steadily enough to justify setting this up. i think she only make a few thousand but it would be nice to shelter that money from the tax woman.
Thanks for the great write-up, Joe!
Let’s see if I have this right:
I can go set up a blog and get an employer identification number, and even if the blog doesn’t generate any income at all, I would still be able to open a Solo 401k and shelter away $19000? And it’s all legal?
That’s a good point. I’m not sure you can do that. From what I understand, the business needs to generate income to contribute.
At least, that’s the employer contribution.
The $19,000 employee contribution, I don’t know.
You could just open a traditional IRA. That seems like the easier route.
After reading more on this subject, I think you only have to start a business with the *intent* to turn a profit. Even if you have little or no revenue, you should still be able to contribute at least the employee portion into your Solo 401k.
It is a great way to tax shelter at least $19000. I am surprised not more people try to take advantage of this. You can even, for example, try to sell a few things on eBay and claim that as your small business.
I don’t think it’s a good idea, you are depositing after tax money to an account that is pretax, you are going to be taxed again when you take it out
Thanks for the article!
With a 401k, you can roll it over to an IRA when you leave your employer. Can you explain how to rollover your individual 401k to an IRA?
Thanks!
When you leave your employer, you have to call the company that manages your 401k. Tell them you want to do roll over and they’ll send a check to your brokerage. It’s pretty easy.
Thanks!
So, if I start my own blog, I am the employee and the employer?
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.
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! 🙂
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
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.
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!
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.
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.
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.
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
Having too much in the retirement accounts is way better than having too little. 🙂
Nice job!
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 😉
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.
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
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 …
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.
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.
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.
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.
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!
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!
Thanks! If I can do this for 5 more years, we’d bet set. 😉
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.
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.
Hi Dave! I wondered about that same thing for Joe. It’s a matter of what will the tax tables be in the future, what will your income be then, etc. Thanks for the input on this topic! (I had another question – further down in the comments – if you have an opinion. I’d love to hear your thoughts. ~smile~ Roseanne
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.
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.
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.
I didn’t know that. That sounds like a great option. I will check it out if I ever get a real job again. 🙂
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! 🙂
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. 🙂
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.
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.
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
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.
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.
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
Nice. You can shelter some of that Airbnb income. That’s earned income, right?
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.
Good luck with your side project. The Solo 401k is a great way to shelter self employment income.
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.
“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 🙂
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…