My Experience with Vanguard’s Individual 401k

This article is for the people who are thinking about self employment or are wondering about the retirement saving options for the self employed. The first part is about how much you can save and the second is about my experience with Vanguard.

Individual 401k – a great option for soloprenuers

2013 was the first full year that I was self employed and I did well enough to continue saving for full retirement. Before I left my corporate job, I calculated that we would need about $500/month from my online business to make ends meet without dipping into saving. If I make anything more than that, I can contribute a tax advantaged retirement account to reduce our tax liability. Taxes take such a big bite out of your income and you should try to reduce your tax as much as possible.

Here are the main options for the self employed.

  • SEP IRA. The employer (self) can contribute up to 25% of your income to this account.  The cap was $51,000 in 2013 and $52,000 for 2014.
  • SIMPLE IRA. The employee (self) can contribute up to $12,000 in 2013. The employer (self) can match up to 3% of the employee’s compensation.
  • Individual 401k aka solo 401k. This one is only for solopreneurs with no employee (or just the spouse.) The employee (self) can contribute up to $17,500, the standard 401(k) limit. In addition, the employer (self) can contribute up to 25% of the earned income. The total limit is $51,000 in 2013 and $52,000 in 2014. You can add another $5,500 if you’re at least 50.

In 2013, I made about $33,000 and I’m keen to avoid tax as much as possible. If we can reduce our tax liability enough, we can get into the 15% tax bracket and won’t have to pay tax on our dividend income. I plugged $33,000 into the calculator at and here is the result. The individual 401k enabled me to save more than the other accounts so I went with that.

vanguard individual 401k i401k solo 401k self employed

At first, this seems a little off to me. For the individual 401k, I thought I should be able to contribute $17,500 plus 25% of $33,000. Well, I should have known it wouldn’t be that simple when it comes to the IRS. Here is what I got from

When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

  • one-half of your self-employment tax, and
  • contributions for yourself.

You need to sit down with one of those crazy 21-step worksheets to figure out your maximum contribution.

Anyway, I already plugged my number into TurboTax and the result is the same. So for 2013, I will contribute $17,500 + $6,000 to make it $23,500. BTW, if you are self employed and have some contractors working for you, then you need to do part of your taxes in early January because you need to send out the 1099-MISC. Yes, it’s tax time already. Yuck!

Vanguard i401k

I decided to go with Vanguard for my individual 401k. Vanguard is a great company and I like their index investing approach for my 401k.

I called Vanguard and set up an appointment with the small business service division. Later on, I talked to Vanguard’s representative for about 30 minutes. He went over what Vanguard is all about and their investing philosophy. They wanted to make sure we are the right fit for each other. For my i401k account, I will be buying and holding index funds, so it’s a good fit. If you trade often, then Vanguard probably isn’t the right choice for you.

Here are some details.

  • Cost – $20 per year for each Vanguard fund held in the i401k account.
  • Investment choices – More than 100 Vanguard mutual funds. I found out later that I couldn’t invest in Admiral Shares in the i401k account. Admiral Shares have lower expense ratio than the investor shares so they are less costly.
  • Roth option – Vanguard is one of the few companies to offer Roth 401k.
  • 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 do this anyway.
  • Fee waiver – If you have more than $50,000 with Vanguard, then they will waive the $20/year fee.
  • IRS – You will have to file form 5500 with the IRS if the i401k plan asset is over $250,000. See the IRS’ instruction for form 5500.

The representative told me that this account probably isn’t the right place to build a complete portfolio because of the per fund fee. I agree and targeted only one midcap index fund in this i401k account. I didn’t have much midcap investment in my other accounts so this would be a good place for it. I use Personal Capital to keep track of our asset allocation and I added the new Vanguard account there. It’s quite helpful to see all your asset classes mapped out.

vanguard i401k asset allocation midcap

I like Vanguard’s customer service and would recommend them. There was a little problem with the account application paperwork and they helped me straighten out everything. I also feel like I could call them anytime. They are friendly and not intimidating or pushy.

All in all, I’m satisfied with Vanguard. The only problem I have is the inability to invest in their Admiral Shares. I wasn’t sure how much I could contribute in 2013 so I waited until November to open an account and contributed $17,500 in one shot. Normally, you need the minimum of $10,000 to start investing in Admiral Shares. I met that minimal qualification so I thought I should be able to invest in the Admiral Shares. For some reason, they won’t let you invest in Admiral Shares in the i401k account. That’s a bit baffling to me.

For 2014, I will contribute $1,450/month so I can take advantage of dollar cost averaging. The good thing about Vanguard is you won’t have to pay a transaction fee each time you invest. At Firstrade, I have to pay $10 for each trade. At Etrade, it is $20 each.  I know, I have accounts in too many brokerages. I’ll consolidate them one of these days. If we have extra money at the end of the year, then I’ll add the employer contribution again.

Let me know if you have any questions and I will try to answer them. As for the 401k from my previous employer, I rolled it over to an IRA and that worked out very well last year.

Are you self employed? If so, are you saving for retirement? I know it can be difficult to save when you’re struggling day to day, but you need to plan for the future as well.

Disclaimer: I’m not a financial adviser and the information here might not be 100% accurate. You need to do your own research before investing.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

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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75 thoughts on “My Experience with Vanguard’s Individual 401k”

  1. The individual (solo) 401-K is a lousy deal. Not only can’t you invest using ETFs, but not all Vanguard funds are available. Some transactions can be done on the main V site and others have to be done on the small biz site. It’s a difficult, cumbersome, restricted plan to use. I plan to transfer to another institution.

  2. Hi! Thank you for the article! I also opened my 401k with Vanguard last year. Now it’s tax time and I can not figure out how to actually deduct the “employer” contribution in TurboTax. When I enter it, it doesn’t affect the amount of tax I own. Do you have any advice? Thank you!

  3. I have Vanguard i401k and now want to invest in a different fund with new money. How do I add a fund option to the plan? I could do an exchange with my current funds (sell existing fund and buy a new fund). I would prefer to be able to make a new contribution and directly buy a new fund. I have tried call Vanguard but I keep getting the wrong department after waiting three hours for a callback.

    • From what I understand, the only way to add a fund is to talk to them on the phone.
      I never had much problem. Try to get a human on the line and ask to speak to the small business plan.
      Maybe it was a bad day for them.
      Good luck!

  4. Hi, question.
    can the solo shareholder of an scorp do company contribution only or need to be both,As employee and employer.?
    also, the employee contributions, need to be done thru payroll?

    • I’m sorry, but I don’t know the answer. I don’t know much about S corp.
      RB40 is a sole proprietorship and I’m pretty sure we could do just the company contribution.
      But then, I won’t save much because RB40 doesn’t make that much money.
      Give Vanguard a call. They can answer your questions.

      • The S corp is the “employer” of the shareholder (referred to as ER in IRS docs) and contributes from S corp funds as a “pension” expense (reducing S corp income).

        As the sole shareholder / owner / employee your contributions (to the limit) come from your “earned income” and (for IRA contributions) reduce your earnings but not your SSA / Medicare / state earnings.

        Yes, it’s complex. Lead IRS resource at

  5. Have you or anyone else been able to get paperless statements from them somehow? I’ve had my Vanguard individual 401k 10 years and am quite fed up with the inability to go paperless. My new local PO is highly incompetent and misdirect mail on a weekly basis. I know Vanguard mailed another statement weeks ago. Now one of my inconsiderate neighbors may know the account numbers and balances for my accounts. Perhaps this is how they justify charging $20 per fund?

    Plus, the ridiculously outdated and useless website. You can do next to nothing on it to administer your own plan and instead have to call in for every little thing, such as address change. I can’t say their reps have ever been very helpful either. Used to be a big fan of Vanguard for the low expense ratio, but this bizarre, antiquated servicing of accounts for small business owners is downright offensive.

  6. Looking at the paperwork for Vanguard’s Individual 401(K) – as self-employed, e.g. real estate agent, employer is employee one of the same, correct? Employer = Employee (1)?

  7. Hi there:

    This article did clear lot of my doubts and have given me confidence.
    Heartfelt thanks and appreciate you taking time.

    I already have a Roth IRA and am contributing every year.
    I am self employed.

    Is it possible I can start a Solo Roth 401K and contribute, in addition to my contribution to Roth IRA?

    Thanks again for the article.

  8. This was just the i formation I was looking for, thanks for your work!

    One question: Does Vanguard allow you to invest the employee portion in a Roth 401k and then put the employer portion in a tax-deferred 401k account?

  9. I have a Vanguard Personal 401k for a few years now, and I think it is great. I am self-employed, so it is perfect for me. Since I am over the magic age (50), my maximum contributions possible for 2016 (employee + employer + catch-up) is $59,000. Not sure if I will get close to that, but (since my income exceeds that amount) I will make a very large contribution so I will get a hefty tax deduction. (In fact, over the course of the year I have made several contributions to my account already.)
    Gotta love it!

  10. I have a solo 401k with Vanguard and I was thinking that you could use the solo to add your money to the account, but then contributions once a year you could transfer those to an IRA held at Vanguard that DOES have access to admiral shares. It’s an easy way to get away from the whole admiral share thing. I don’t believe rollovers count toward limits so I can’t see a reason why not.

  11. Joe,
    I did further research and you’re right, it appears only *employee* contributions are allowed to Roth 401(k) accounts. I can’t find anything in Pub 560 nor in the IRS bulletin that amended the 401(k) regs to create Roth accounts ( that explicitly *prohibits* employer contributions, but both of these documents only mention *employee* contributions for Roth. Further, the Vanguard Individual 401(k) New Account Form, page 2, states the following:

    “You can establish either of the following account types—or both—within the Vanguard Individual 401(k) Plan:
    • Individual (pre-tax). Allows both employee salary deferral and employer contributions.
    • Roth (after-tax). *Allows only employee salary deferral contributions.*” (asterisks mine)

  12. Hi, and thanks for sharing your knowledge of solo 401(k)s. I’m setting one up for myself for the first time this year, so it’s helpful to know what others have learned.

    I do think you might have something not quite right – and it looks like others are confused about this as well (as I was – maybe still am, I’m not a tax regulation expert).

    You say “you need to sit down with one of those crazy 21-step worksheets to figure out your maximum contribution”. I believe you are referring to the worksheet at the back of IRS Pub 560.

    I worked through that worksheet myself and I believe it calculates your maximum *deduction* (it’s actually called “Deduction Worksheet for Self Employed”) – i.e. how much you can deduct for income tax purposes. But that is not (necessarily) the same as your maximum *contribution*.

    Based on my reading of page 14 of pub 560, a person with self-employment income can *contribute* the max of your compensation (which, reading back though the definitions, looks like net profit before taxes) or 52K (2014 limit).

    Now someone might ask, why would I want to contribute more than what I can deduct? If you want to contribute to a Roth account would be a good reason.

    Look at page 4 of Pub 560 – Contributions and Deductions are both defined, and they are defined differently. You can’t use them interchangeably for purposes of interpreting the IRS regulations.

    What do you think?

    • Thanks for your input. I’m not an expert either, but I think the contribution over $17.5k is not Roth. It’s the 401k after taxed contribution. You will have to pay tax on the gain when you withdraw. You probably should check with a tax accountant.
      You’re right that contributions and deductions aren’t the same thing. I need to research a bit more. Thanks again.

  13. RB40, sounds like you have done some research on these i401ks. Did you come across any sites that talk about eligibility requirements? I have my hand in several different businesses, one of which has employees. I know the i401k isn’t an option insofar as that biz is concerned, but could I adopt a i401k in one of my other truly solo ventures? can my wife do her own i401(k) if i hire her on a 1099 basis?

    • You can call Vanguard and get a solid answer on the phone. If you have a business, you should be able to contribute to an i401k. The business doesn’t have to be a solo venture. Your wife can probably do her own i401k, but you’d have to put her on payroll and all that. You might want to talk to a tax accountant to see if there is any advantage to it. I think Vanguard would be very helpful for you.

  14. This is great information, sir. Keep it up!

    Here’s a question about the qualifications for an individual 401K. My wife works 20 hours a week as a translator for a hospital. She receives no benefits or retirement from them, just a straight hourly wage. She’s coded in their system as a “contractor.” Is she eligible to open an individual 401k with Vanguard and max it out at $17,500? What else do you need to qualify for this? Would this affect her ability to fund a yearly IRA at $5,500, as well? Thanks for your help!

    • I’m pretty sure she can open an solo 401k with Vanguard. You should call them and verify. The Vanguard people are very helpful and should be able to answer both your questions. I think she can fun the IRA at $5,500 as well.

    • You pay the expense ratio associated with the funds.
      For example, the expense ratio is 0.17% on Vanguard Total Stock Mkt Idx Inv (VTSMX).

  15. I think you are not understanding the pricing at E*trade. Vanguard’s no-load funds can be purchased at E*Trade without any fee. The $20 fee that you state is charged is only if the mutual fund is one which charges a transaction fee/sales fee. If the fund is a no-load, no-transaction fee fund (which includes over 1,300 funds) you can purchase them without paying loads, transaction fees, or commissions. Since there is no data to prove that the mutual funds which charge a transaction fee or sales fee perform any better than the no transaction fee, no-load funds, it would only seem prudent to save your money and purchase no-load funds….and obtaining them free at E*Trade or any other broker that offers them without a fee. Likewise, there are other brokers which offer no transaction fee, no-load funds without brokerage fee. The reason why I prefer a brokerage over just being at a fund family is because I can purchase a variety of other investments in addition to the same mutual funds that can be purchased at a fund family (like, in your case, Vanguard). I hope this information clarifies your understanding and helps you and others in their decision-making.

    • Okay, thanks for the clarification. The Vanguards funds that I’ve looked at charges transaction fee at E*Trade.
      I assumed that most no-load, no transaction fees, no commission funds have high expense ratio. Is that the wrong assumption? They have got to make money somehow, right?

  16. I’ve been thinking about a solo 401k myself. My situation is a little different. I am a full time police officer and pay regular employment taxes on that income. However, as most police officers I have side jobs where I earn income. Some issue a 1099 and some take out taxes and issue a W2. Would I still be able to count my side job earnings where a W2 is issued even though I pay taxes throughout the year? When I file my taxes at the end of the year it’s joint with my wife who also works.

    • I’m sorry, but I don’t know the answer to your question. It sounds tricky because you already have a full time job and I assume you contributed to your retirement plan there. You should call Vanguard small business plan and see what they say. They were very helpful when I talked to them.

  17. Need help deciding retirement!!

    Hi everyone, My wife & I are both self employed, we have retail small business, we both file joint return.

    Net Income 2013 was $56000
    no state tax
    my age 44 and wife 45

    can we both have separate retirement plan?

    whats the best plan for us, currently we do not have any retirement plan.


  18. I recently opened the individual 401k at Fidelity but looking to transfer to Vanguard. I have yet to make deposits for 2013 but wondering when I transfer to Vanguard will this trigger capital gains tax? My funds when deposited into Fidelity will most likely just sit in the money market fund until I transfer. I was also wondering how re-allocation works in the Vanguard individual 401k, does reallocation trigger capital gains tax in these self-employed 401k accounts?

    • It shouldn’t be a tax event. You just need to make sure Vanguard roll it over correctly. Don’t tell Fidelity to send a check to you. Vanguard should be able to help you with this process. They have a very good customer support team. Just give them a call.

  19. If my self employed work is really up and down…ie one year I might make nothing, the next 100K, and I have a second job where I am the employee but there is no 401k offered, can I and is it smart to start a individual 401k?

    • Yes, I think you really should open an i401k. On the year that you make a lot of money, you can contribute more. On those slow years, you don’t have to contribute. It’s very flexible.

  20. Those are awesome options for most! I think the best thing is that you are able to use vanguard for it. I hate my 401K which fund has a fee of 1%+

    There are other options under the defined benefit world (but you have to be putting in that 75K+ to make it worthwhile).

  21. Thanks for the detailed writeup of the process and fees with Vanguard.

    I first heard of the solo 401k a few years back when I was looking at starting a consulting business. As far as I’m concerned it’s one of the primary reasons to be self-employed. Most people complain about all the extra taxes you have to pay, but being able to put $51K a year into a tax sheltered retirement account more than makes up for it.

  22. Nice work Joe! I’m a bit surprised as well that they wouldn’t allow you in to the Admiral Shares. We were between the Solo and a SEP and decided to go the SEP route as our tax guy said it would work best for us. Last year was our first full year as well having us both being self-employed and we did put money aside each month but kept it in cash. I’m still kicking myself over that, but hindsight is 20/20. We’ve scheduled monthly contributions starting with this month so we’re good to go now moving forward.

    • We kept cash for most of the year too. We missed out on the gain, but I don’t think it’s a huge deal. I didn’t know how much money I’d make so it was better to be more conservative.

      • Such an informative article, thanks! Just a quick question- my wife and I have an LLC that is taxed as an s corp with no employees for our part-time business. We should be able to setup a solo 401k for each of us right?

        Also, what if your total profit is $5000-10000? Would one be able to contribute the entire $5000\10000 to the 401k?

        Thanks again for the great article, really got me thinking!

  23. I’ve never been a business owner, but I have read about the i401(k). I probably would have gone with either Fidelity or Schwab once I found out that you can only get investor shares in the Vanguard i401(k). I don’t specifically know if you can get Fido Advantage Class fund shares in their i401(k), but it would be worth checking on. If you had gone with Schwab, you could have used their Schwab index ETFs which have lower expense ratios than Vanguard for similar funds, such as Total US Market Schwab SCHB ER=0.04%, Vanguard Admiral Total US Market ER=0.05%, and Investor Class Total US Market ER=0.17%

  24. I’ve had a Vanguard 401k for a couple years now, but you definitely did more research than I did. I didn’t realize the 25% was on earned minus contributions. I’ve just been doing a flat 25%, I wonder who polices that, lol. This also explains why I couldn’t upgrade my fund to an Admiral (> $10k) like I could in my other Vanguard accounts. I just assumed the fund didn’t have a corresponding Admiral. I like the ease of the account administration, I can transfer money into any of my accounts (Roth, Trad, 401k) at any time with no extra charge. One regret I have is I rolled my old 401k into Vanguard prior to setting up my business i401k. Vanguard doesn’t allow you to combine the accounts after the fact.

    • If you over contributed, you probably need to talk to a tax adviser. I don’t know how you would go about fixing that kind of issue. I’m sure the IRS would be very unhappy. You can use Turbotax or the online calculator at to see your limit.
      Is there any disadvantage to having your old 401k in an IRA? Seems pretty similar to me.

      • I just wanted to combine those buckets of money for easier asset allocation. After using Personal Capital I wanted to adjust our allocation a little bit and wanted to simplify with one less account.

  25. I rolled all of my work 401K to Vanguard and got Admiral Shares – Wellington when I took early retirement buyout. Great service, inexpensive fees, terrific Mutual Fund results. Highly recommend them.

  26. Thanks for the article; I’ve been looking forward to this one. I had started a SEP IRA over 3 years ago and didn’t really investigate the solo 401k option. I max it out yearly and could benefit from the higher contribution limits of the solo 401k, but I’ve been depositing the excess savings into a pre-existing ROTH IRA and a taxable account. I think this year I may focus on dividend and similar stocks/ funds in the taxable account to build those up and generate the holy grail of passive income. I should have started a 401k a few years ago, I may be too late to the party as per my goals.

    • Good luck with the dividend stocks. I like our taxable accounts too, but I’m trying to minimize our taxable income for now.

  27. Joe, I am starting a side business and didn’t know if any of these options are available to me with that income, even if I’m already maxing out a 401k through my current employer. Any possibility of double-dipping?

    • From my research, you can contribute up to 25% of your income from your side business as employer contribution. You can’t double dip on the employee defer compensation side.

  28. I kept calling Fidelity to set up a Solo 401K and gave up after being on hold three times for over 30 minutes each. I want to roll a 401K from my former employer into the solo 401K. I also wanted to now about fees associated with the account and any compliance reporting requirements. Do you know who files the 5500 form? Does Vanguard do that for you?

    • You have to file it yourself if the i401k plan has over $250,000 in it. I just updated the article with this info. Thanks.

  29. Thanks for the post! I am right in the middle of figuring this out on my taxes. I am struggling to find the answers to a couple of questions:
    1. Can you contribute more than the revenue for your business in one year? e.g. Online store had gross revenue of $15K, but I want to make max contribution of $17500.
    2. Since you have several different income streams, is the 25% based on the aggregate or on one business? I have a series LLC with numerous sub-companies, but no single companies is >$17500.
    3. Similar to a group 401k, does a solo401k forfeit the Trad. IRA tax deduction?

    • I’m not a tax accountant and you might have to consult a real one.
      1. I don’t think you can contribute more than your income. I plugged $15,000 in the calculator and it said you can contribute about $14,000 with the i401k.
      2. I don’t know. Try a tax software like Turbotax and see what it says. It makes sense if you can look at the total income from all your LLCs.
      3. Yes, it’s the same $17,500 from what I understand.

  30. I’m digging the solo 401(k)!

    Just thought of something though. If you only make $33,000 a year, would it not be better to pay taxes on that income as you can hopefully assume that your net worth/withdrawals will be greater than $33,000 a year at 59.5?

    • He can probably do solo Roth 401K, but he probably doesn’t want to pay taxes today. My taxes for example are so high, I can live on that amount actually ( Fed, State, Local, FICA)

      If he pays taxes today, and invests in a regular account, he would pay taxes for 20 – 30 years on cap gains and dividends. And in retirement also.

      But with a regular 401K, his money compounds tax deferred until he has to make distributions at age 70.5 years. Plus he can put the tax savings to work in taxable investment accounts. Then he would have to pay ordinary income taxes on withdrawals (RMD).

      It is a trade-off of whether you pay taxes today, or you pay them in the future. I

      If at some point his taxable income is low, he can roll over portions of the 401K into a Roth and pay lower or no taxes.

      • Thanks for answering. Yes, Mrs. RB40 is still working. When she quit work, we’ll have the opportunity to rollover some of the retirement account to Roth IRA.
        We also want to be in the low tax bracket for dividend income and possible rental sales. I need to talk to a tax account about the rentals…

    • His spouse is still working, so their joint income is more than his $33,000. Also of course he has Oregon income tax to deal with, which is high (9% – 11%-ish).

      In general, though, you’re right of course. Tax deferral may not be the best approach for someone in a low tax bracket.

  31. I’ve got to get a website started…and bring in a solo income first to make this work. 🙂

    As a Vanguard Voyager customer, I agree they are a great low cost fund provider. I’ve been with them for over two decades now. Founder John Bogle spoke at my graduation.

    • Thanks for writing this article. I set-up a SEP IRA last year, since I already have a 401 (k) plan at work.

      I was wondering however, do you have to pay $20/year per fund with Vanguard if your total assets exceed $50K, or was the $20/year a mere annual administrative charge? Are there any other charges with Vanguard?

      I was also wondering what are the reporting requirements for individual 401 (k) plans? At what stage do you need to submit form 5500 annually? Is there any other paperwork one needs to be aware of?

      And last but not least, did you research other solo 401 (k) providers, before you selected Vanguard? What were your criteria for provider selection?

      • From what I understand, the $20/year per fund fee is waived if you have more than $50K invested. That’s the only fee other than the regular expense ratio.

        I did a little research and I don’t need to file the 5500 form until the plan’s value is over $250,000. I will update the article.

        I only checked with Etrade. From my conversation, it’s just like a regular IRA and you pay the same fee. For this account, I wanted to invest in Vanguard funds so that was the main reason I went with Vanguard. I also looked at Fidelity briefly and they were my 2nd choice.


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