Compare Fidelity Vs Schwab for Brokerage Accounts for Your Self-Directed Solo 401k with Checkbook Control

Here is a comparison between the Charles Schwab and Fidelity brokerage accounts for a self-directed Solo 401k with checkbook control.

VIDEO SLIDES: Click HERE

Similarities:

  • Both Schwab and Fidelity allow opening brokerage accounts in the name of your Solo 401k plan to provide checkbook control over the plan’s investments.
  • They do not charge any account maintenance fees for the Solo 401k brokerage accounts.
  • The brokerage accounts come with a free checkbook to facilitate alternative investment transactions.

Differences:

  • Schwab charges $25 for outgoing wire transfers, while Fidelity charges $20.
  • Brokerage Account Establishment: Fidelity Investments will accept secure upload of the solo 401k brokerage forms if you already have an account at Fidelity (e.g., IRA, former or current employer 401k, or existing solo 401k), or the forms can be mailed to Fidelity if can’t upload. Charles Schwab accepts a fax of the solo 401k brokerage forms and they can be mailed to Schwab’s back office.
  • Contributions: Fidelity Investments accepts solo 401k contributions via ACH-by linking your personal or business bank account to the Fidelity brokerage accounts. Schwab on the other hand only accepts checks or wires.
  • Funding Alternative Investments: Fidelity Investments will wire the funds out but requires the wire directive taken to the local Fidelity branch, or the investment can be processed by check using the solo 401k checkbook. Charles Schwab can also make the investment by and will accept the wire directive by fax. Alternatively, you can use the Schwab issued checkbook to fund the alternative investment.

Other Considerations:

  • Both Fidelity and Schwab are popular choices that make it easy to open brokerage accounts for third-party Solo 401k plans.
  • My Solo 401k Financial assists clients in preparing all the required paperwork for opening the brokerage accounts at either Schwab or Fidelity.
  • The decision may come down to personal preferences, any specific investment needs, and the responsiveness of the respective brokerages.

While Schwab and Fidelity are both viable options, there are some nuanced differences in account establishment, making contributions, and funding alternative investment that could influence which brokerage is a better fit for a particular self-directed Solo 401k brokerage account.

Start a business just so I can have a Solo 401(k)?

Yes, you can start a legitimate business just so that you can open a solo 401k ; however, it is important to note that in order to continue with the solo 401k plan ongoing self-employment activity is required; otherwise, you will be required to close the solo 401k once self-employment activity ceases and transfer the plan to an IRA, for example.

To be eligible for a Solo 401(k) the following applies:

  1. You must have legitimate self-employment income or be a business owner.
  2. You cannot have any full-time employees other than your spouse.

Solo 401(k)s are meant for self-employed individuals and small business owners with no full-time non-owner W-2 employees. Solo 401k plans allow for higher contribution limits compared to traditional IRAs as a way to help the self-employed save more for retirement based on their earned income.

If you do not have legitimate self-employment income or a real business, you would not meet the qualifications for a Solo 401(k) under IRS regulations. Establishing a solo 401k without meeting the eligibility requirements could result in a taxable distribution.

In summary, a legitimate self-employed business that you intend to operate and continue to earn self-employment income from applies when opening a solo 401k plan. If you don’t qualify for a solo 401k plan, an IRA (traditional or Roth) may be another option.

Is there anything specifically different about an LLC that is owned by the solo401k or trust, in terms of it’s legal structure? 

Yes, there are specific differences in the legal structure of an LLC when it is owned by a Solo 401k (aka solo 401k LLC) compared to traditional ownership structures. Here are the key points:

  1. Disregarded Entity Status: When an LLC is owned solely by a Solo 401k, it is considered a disregarded entity for federal tax purposes. This means it does not file its own federal tax return. Instead, all activities are reported on the Solo 401k’s tax filings, if any are required.
  2. Registration and Operation: The LLC must be registered with the state’s Secretary of State, and it operates under a special purpose operating agreement that aligns with Solo 401k regulations. This operating agreement must specifically allow for the Solo 401k to be the sole member and must comply with IRS rules regarding eligible investments and prohibited transactions.
  3. Asset Protection and Liability: Holding assets within an LLC owned by a Solo 401k can provide an additional layer of liability protection. This structure helps to separate the assets within the LLC from other personal or business assets, potentially offering protection against creditors or legal actions.

In summary, an LLC owned by a Solo 401k is treated as a disregarded entity for tax purposes, must operate under specific conditions set by a special purpose operating agreement, and provides additional asset protection and investment flexibility compared to other ownership structures.

DOL Final Rule – Employee Vs Independent Contractor Status Impact on Solo 401k Plans

Those planning to open a solo 401k, which is for owner-only businesses with no full-time non-owner W-2 employees, should be aware of the new DOL ruling for determining employee vs independent contractor status. Reason being, the 401k rules allow for the exclusion of independent contractors but not for full-time W-2 employees for opening a solo 401k plan. On the flip side, an independent contractor can also open his or her own separate solo 401k plan.

The U.S. Department of Labor (DOL) issued a final rule in January 2024 wich went into effect on March 11, 2024 that provides guidance on determining whether a worker should be classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA). 

Here are the key points about the final rule:

  • It rescinds the previous 2021 rule that prioritized two “core” factors and replaces it with a broader “economic reality” test considering the totality of the circumstances.
  • The final rule outlines six non-exhaustive factors with no single factor being weighted more than others:
  1. Opportunity for profit or loss based on managerial skill: This factor takes into consideration whether a certain business skill directly affects a worker’s economic success or failure.
  2. Investments by the worker and potential employer: This factor analyzes whether financial investments made by a worker are considered capital or entrepreneurial in nature.
  3. Degree of permanence of the work relationship: This factor analyzes the work relationship that a worker has with a potential employer.
  4. Nature and degree of control over the work: This factor considers the potential employer’s control over the performance of the work and economic aspects of the working relationship when determining whether a worker is considered an employee or independent contractor.
  5. Extent to which the work is an integral part of the employer’s business: This factor analyzes whether the function that a worker performs is an integral part of the business.
  6. Skill and initiative of the worker: This factor considers if a worker uses specialized skills to perform their work and whether these skills contribute to a business-like initiative.
  7. Additional Factors: The 2024 final rule permits additional factors to be considered if they indicate in some way whether a worker is in business for themself as opposed to being economically dependent on the potential employer for work.

More information about each of the factors and how to analyze each is available using the FAQ: Final Rule: Employee or Independent Contractor Classification Under the FLSA and Small Entity Compliance Guide.

  • The analysis focuses on whether the worker is economically dependent on the potential employer for work (indicating employee status) or in business for themselves (indicating independent contractor status).
  • It clarifies that compliance with specific laws/regulations alone does not indicate control by the employer. Control beyond mere compliance suggests employee status.
  • Investments are evaluated qualitatively (similar to employer’s investments) not just quantitatively.
  • Lack of permanence may be due to operational characteristics of certain industries, which alone does not indicate contractor status unless the worker is exercising independent business initiative.

The final rule, effective March 11, 2024, aims to provide more comprehensive guidance aligning with decades of court precedent on the economic realities test for worker classification under the FLSA. It takes a more employee-friendly approach compared to the previous 2021 rule.

Compare “Free” Charles Schwab Individual 401k Vs Self-Directed Solo 401k from My Solo 401k Financial

Here’s a comparison between the Schwab Solo 401k (aka Individual 401k) and the My Solo 401k Financial Solo 401k:

VIDEO SLIDES: Click Here.

Investment Options

  • Schwab Solo 401k: Schwab is known for offering a wide range of investment options, including stocks, bonds, mutual funds, and ETFs. However, it does not support alternative investments like real estate directly within the Solo 401k plan.
  • My Solo 401k Financial Solo 401k: My Solo 401k Financial allows for a broader range of investment options, including real estate, notes, tax liens, cryptocurrency, precious metals, private placements, and more. A solo 401k from My Solo 401k Financial offers flexibility in investment choices, catering to individuals looking to invest in both traditional and alternative assets.

Loan Feature

  • Schwab Solo 401k:  Schwab’s Solo 401k plan does not allow for participant loans.
  • My Solo 401k Financial Solo 401k: My Solo 401k Financial offers a loan feature, allowing participants to borrow up to 50% of their account balance, up to a maximum of $50,000. This feature provides flexibility for participants who may need access to funds for personal use.

Roth Option

  • Schwab Solo 401k: Schwab offers the employee Roth option within its Solo 401k plan, but does not offer the Mega Backdoor Roth strategy or the Roth employer profit sharing option which resulted with the passage of SECURE ACT 2.0. allowing for after-tax contributions that grow tax-free.
  • My Solo 401k Financial Solo 401k: The My Solo 401k Financial solo 401k plan supports both employee and employer profit sharing Roth contributions and also facilitates the Mega Backdoor Roth strategy, which allows for significantly higher after-tax contributions that can be converted to Roth, without income limits.

Fees and Costs

  • Schwab Solo 401k:  Schwab does not charge a fee to open a solo 401k, and doesn’t charge an annual fee.  Generally, Schwab  doesn’t charge stock trading fees. 
  • My Solo 401k Financial Solo 401k: My Solo 401k Financial charges a setup fee of $525 and an annual compliance support fee of $125. These fees cover plan establishment, compliance support, and access to a wide range of investment options.

Customer Support and Expertise

  • Schwab Solo 401k: Schwab is a large financial institution known for providing general customer support, but not expert support on the rules and regulations surrounding solo 401k plans.
  • My Solo 401k Financial Solo 401k: My Solo 401k Financial is highlighted for offering personalized customer support, including access to experts and compliance officers. This provider emphasizes its expertise in the Solo 401k space, offering guidance on investment rules and plan administration.

In summary, both Schwab and My Solo 401k Financial offer Solo 401k plans with distinct features and benefits. Schwab may be preferred by those looking for a wide range of traditional investment options and potentially lower fees, while My Solo 401k Financial could be more suitable for individuals seeking flexibility in investment choices, including alternative investments, and personalized support, especially for complex strategies like the Mega Backdoor Roth.

2024 How much income do I need to max out Solo 401k contributions? (Sole Prop/LLC/1099-NEC/Contractor)

This post discusses how much self-employment income a self-employed individual needs to maximize year 2024 solo 401k contributions for a Sole Proprietorship, Single Member LLC, 1099-NEC, or Independent Contractor self-employed business. For 2023 contributions, click here.

For Video Slides, CLICK HERE.

Year 2024 Scenario #1 – Maximize Solo 401k Contributions While Keeping Self-Employment Income as Low As Possible

Assumptions

  • Self-employed business taxed as Sole Proprietor, Single Member LLCs, 1099-MISC/NEC Independent Contractor
  • One Participant
  • Does not make contributions to another plan (“day job” 401k)
  • Contribute 100% of self-employment compensation (i.e. Line 31 of Schedule C less one-half of self-employment tax)
  • Only Make Employee Contributions (Salary Deferrals)

Self-Employment Income Needed:

  • Line 31 of Schedule C: $24,749 (or $32,819 if 50 or older)
  • Self-Employment Compensation: $23,000 (or $30,500 if 50 or older)

Contribution Amounts:

  • Employee (Pre-tax or Roth): 100% of Self-Employment Compensation up to $23,000 for 2024 or $30,500 if age 50 or older [100% of Self-Employment Compensation up to $23,000 for 2024 plus $7,500 catch-up contribution if age 50 or older]
  • Employer Pre-tax Contributions: $0
  • Voluntary After-Tax: $0

Year 2024 Scenario #2 – Maximize Solo 401k Contributions While Keeping Self-Employment Income Low

Assumptions

  • Self-employed business taxed as Sole Proprietor, Single Member LLCs, 1099-MISC/NEC Independent Contractor
  • One Participant
  • Does not make contributions to another plan (“day job” 401k)
  • Contribute 100% of self-employment compensation (i.e. Line 31 of Schedule C less one-half of self-employment tax)
  • Make Employee (Salary Deferrals) and Employer (Profit-Sharing) Contributions

Self-Employment Income Needed:

  • Line 31 of Schedule C: $30,935 (or $41,023 if 50 or older)
  • Self-Employment Compensation: $28,749 (or $38,124 if 50 or older)

Contribution Amounts:

  • Employee (Pre-tax or Roth): Up to (i) $23,000 for 2024 or (ii) $30,500 if age 50 or older [100% of Self-Employment Compensation up to $23,000 for 2024 plus $7,500 catch-up contribution if age 50 or older]
  • Employer Pre-tax Contributions: (i) $5,749 or (ii) $7,624 if age 50 or older [20% of Self-Employment Compensation provided total contributions don’t exceed overall limit]
  • Voluntary After-Tax: $0

Year 2024 Scenario #3 – Maximize Pre-Tax Solo 401k Contributions

  • Assumptions
  • Self-employed business taxed as Sole Proprietor, Single Member LLCs, 1099-MISC/NEC Independent Contractor
  • One Participant
  • Does not make contributions to another plan (“day job” 401k)
  • Maximize Pre-tax Solo 401k Contributions to Reduce Taxable Income
  • Make Employee (Salary Deferrals) and Employer (Profit-Sharing) Contributions

Self-Employment Income Needed:

  • Line 31 of Schedule C: $243,717
  • Self-Employment Compensation: $230,000

Contribution Amounts:

  • Employee (Pre-tax): Up to (i) $23,000 for 2024 or (ii) $30,500 if age 50 or older [100% of Self-Employment Compensation up to $23,000 for 2024 plus $7,500 catch-up contribution if age 50 or older]
  • Employer Pre-tax Contributions: $46,000 [20% of Self-Employment Compensation provided total contributions don’t exceed overall limit]
  • Voluntary After-Tax: $0

Year 2024 Scenario #4 – Maximize Roth Solo 401k Contributions

Assumptions

  • Self-employed business taxed as Sole Proprietor, Single Member LLCs, 1099-MISC/NEC Independent Contractor
  • One Participant
  • Does not make contributions to another plan (“day job” 401k)
  • Goal is to Maximize Roth Solo 401k and/or Voluntary After-Tax Contributions
  • Note: Assume all Employer Contributions made as Pre-tax because making Employer Contributions as Roth contributions offers no substantive advantage over Mega Backdoor Roth Solo 401k Contributions.

Self-Employment Income Needed:

  • Line 31 of Schedule C: $74,246 (or $82,316 if 50 or older)
  • Self-Employment Compensation: $69,000 (or $76,500 if 50 or older)

Contribution Amounts:

  • Employee (Pre-tax): Up to (i) $23,000 for 2024 or (ii) $30,500 if age 50 or older [100% of Self-Employment Compensation up to $23,000 for 2024 plus $7,500 catch-up contribution if age 50 or older]
  • Employer Pre-tax Contributions: $0
  • Voluntary After-Tax: $46,000 [Lesser of Self-employment compensation or the overall limit of ($69,000 for 2024) reduced by any employee or employer contributions made to the Solo 401k]

Vanguard Exits Individual 401k Business and Sells to Ascensus-Impact and Options for Solo 401k Account Holders

Vanguard Individual 401k to Ascensus Transition Hub:

Resource Center for Existing Vanguard Solo 401k Account Holders

On April 16, 2024 Ascensus announced their agreement to acquire Vanguard’s Individual 401(k) plans business. As a result, owner-only businesses with Individual 401k plans (aka solo 401k plans) at Vanguard may want to consider restating their solo 401k plan to another solo 401k plan provider such as My Solo 401k Financial as they offer a fully self-directed solo 401k for one flat fee of $525 plus an an annual fee of $125.

  • Why Switch?
    • 100% FLAT FEE self-directed plan including Mega Backdoor Roth Alternative Investments for no additional charge
    • Expert Compliance Support (5500-ez, 1099-R, expert compliance team, etc.) for no additional charge
    • Auto Enrollment Tax Credit: Our self-directed solo 401k plan is now eligible for up to $1,500 in dollar-for-dollar tax credits. Visit here to learn more.

Key Dates for Existing Vanguard Solo 401k Account Holders

DateEvent
July 17, 2024, 4 pm ESTLast day to initiate transactions, including contributions, change investments, or take a distribution through Vanguard.
July 19, 2024Last day to access your Vanguard Solo 401(k) account.
Week of July 22, 2024Your Vanguard Solo 401(k) account transitions to Ascensus Solo 401k platform.
Source: Information shared by existing Vanguard Solo 401k account holders

Impact and Options for Vanguard Solo 401k Account Holders

We recently hosted a deep dive discussion of the impact and options for existing Vanguard Solo 401k Account holders. You can watch the entire discussion at the following link or scroll down to view the key highlights as well as comparisons of the Solo 401k offered by My Solo 401k Financial vs plans offered by Fidelity, Schwab and E*Trade.

Download Powerpoint Slides: Impact & Options for Vanguard Solo 401k Account Holders

Vanguard Solo 401k to Ascensus vs My Solo 401k

Vanguard Solo 401k: The Frugal Investor

  • If no action is taken, existing Vanguard Solo 401k accounts will be transitioned to Ascensus Individual 401k Plans and subject to the following fees:
    • $20 per participant
    • $20 per mutual fund
  • Including the tax credit, the net cost to set up and maintain a Solo 401k with My Solo 401k Financial is $0 over the first seven (7) years.
    • Fees paid with non-retirement funds to preserve retirement funds

Vanguard Solo 401k: The Roth Maximizer

  • If no action is taken, existing Vanguard Solo 401k accounts will be transition to Ascensus Individual 401k Plans which does not allow for:
    • NO Roth Employer Contributions
    • NO Mega Backdoor Roth Solo 401k Contributions
  • With a Solo 401k from My Solo 401k Financial, a Solo 401k owner can make both Employer contributions as Roth Solo 401k contributions as well as Voluntary After-Tax Solo 401k contributions (Mega Backdoor Roth Solo 401k):
    • Contribute up to $69,000 (or $76,500 if 50 or older) as Roth/Mega Backdoor Roth Solo 401k contributions

Vanguard Solo 401k: The Large Account Holder

  • If no action is taken, existing Vanguard Solo 401k accounts will be transition to Ascensus Individual 401k Plans which does not handle the Form 5500-EZ which is required once the value of the Solo 401k plan exceeds $250,000:
    • Form 5500-EZ required once the value exceeds $250k
    • Update 4/22/2024: As discussed in our My Community forum on the topic, Ascensus confirmed that they will not handle the Form 5500-EZ and will refer you to your CPA/Tax advisor.
  • My Solo 401k Financial handles Form 5500-EZ preparation for Solo 401k plans that need it as an optional free service (no additional charge):
    • File Form 5500-EZ filed under the electronic filing system (EFAST)

Vanguard Solo 401k: The Alternative Investor

  • If no action is taken, existing Vanguard Solo 401k accounts will be transition to Ascensus Individual 401k Plans which limits investments to certain Vanguard Mutual Funds:
    • No Non-Vanguard Mutual Funds, Stocks, Bonds, Certificates of Deposits
  • My Solo 401k Financial helps clients open accounts at the bank or brokerage of choice:
    • “Free” Brokerage Accounts at Fidelity, Schwab, etc. with free online traditing to invest in stocks, bonds mutual funds, etc.
    • Bank Accounts
    • Alternative Investments such as
      • Real Estate
      • Private Placement
      • Private Stock
      • Crypto
      • Precious Metals
      • Notes

Vanguard Solo 401k: The Rainy Day Investor

  • If no action is taken, existing Vanguard Solo 401k accounts will be transition to Ascensus Individual 401k Plans which don’t allow Solo 401k participant loans:
    • No 401k Loans allowed
  • With a Solo 401k from My Solo 401k Financial, a Solo 401k owner may take Solo 401k participant loan(s)
    • Borrow up to 50% of the balance not to exceed $50,000 (per participant)
    • Loan Document Preparation

Other Options for Vanguard Solo 401k Account Holders

Vanguard Solo 401k to Schwab vs My Solo 401k

FeatureSchwabMy Solo 401k
Account Opening ProcessComplete Adoption Agreement and other paperwork1 Min App to Open Solo 401k
Brokerage Account(s) at SchwabYesYes
Net Cost to Open & Maintain Plan over First 7 years$0$0 including $1500 tax credit
Employer Roth ContributionsNoYes
Mega Backdoor Roth ContributionsNoYes
In Plan Roth RolloverNoYes
Solo 401k Participant LoansNoYes
Alternative Investments (e.g., Real Estate, Private Stock, Private Placements, Crypto, Notes, Gold/Precious Metals, etc.)NoYes
Solo 401k Compliance Support (e.g., 5500-EZ, 1099-R, etc.)NoYes
$1500 Solo 401k Tax CreditNoYes
Open Accounts at 100s of banks, brokerages, cryptocurrency and alternative investment platformsNoYes

Vanguard Solo 401k to Fidelity vs My Solo 401k

FeatureFidelityMy Solo 401k
Account Opening ProcessComplete Adoption Agreement and other paperwork1 Min App to Open Solo 401k
Brokerage Account(s) at FidelityYesYes
Net Cost to Open & Maintain Plan over First 7 years$0$0 including $1500 tax credit
Employee Roth ContributionsNoYes
Employer Roth ContributionsNoYes
Mega Backdoor Roth ContributionsNoYes
In Plan Roth RolloverNoYes
Solo 401k Participant LoansNoYes
Alternative Investments (e.g., Real Estate, Private Stock, Private Placements, Crypto, Notes, Gold/Precious Metals, etc.)NoYes
Solo 401k Compliance Support (e.g., 5500-EZ, 1099-R, etc.)NoYes
$1500 Solo 401k Tax CreditNoYes
Open Accounts at 100s of banks, brokerages, cryptocurrency and alternative investment platformsNoYes

Vanguard Solo 401k to E*Trade vs My Solo 401k

FeatureE*TradeMy Solo 401k
Account Opening ProcessComplete Adoption Agreement and other paperwork1 Min App to Open Solo 401k
Brokerage Account(s) at E*TradeYesYes
Net Cost to Open & Maintain Plan over First 7 years$0$0 including $1500 tax credit
Employee Roth ContributionsYesYes
Employer Roth ContributionsNoYes
Mega Backdoor Roth ContributionsNoYes
In Plan Roth Rollover???Yes
Solo 401k Participant LoansNoYes
Alternative Investments (e.g., Real Estate, Private Stock, Private Placements, Crypto, Notes, Gold/Precious Metals, etc.)NoYes
Solo 401k Compliance Support (e.g., 5500-EZ, 1099-R, etc.)NoYes
$1500 Solo 401k Tax CreditNoYes
Open Accounts at 100s of banks, brokerages, cryptocurrency and alternative investment platformsNoYes

More Resources:

  • Ask Questions and see what others are asking in our My Community Forum for Existing Vanguard Solo 401k Account Holders.
  • Click HERE to get started with converting your Vanguard Solo 401k to My Solo 401k

Original Roth i401k Contributions Maintained QUESTION

Will the original contribution date of 2019 be maintained if I transfer these two accounts to my401K Roth accounts? Or will the clock reset on the 5 year rule?

Yes, as the existing i Roth 401k would get restated to our solo 401k plan. A restatement results in keeping the original plan effective date; hence why we ask for it on our online application.

Can I Use Fidelity Invesments to Hold the Roth Solo 401k Funds QUESTION

Will I be able to use Fidelity where I currently have an account for further contributions to the Roth i401K, as Fidelity itself does not offer a Roth i401K?

Yes, you will be able to use Fidelity Investments to hold the Roth 401k funds and we will assist you in opening these brokerage accounts with Fidelity as part of the solo 401k restatement process

Registration of the Solo 401k Brokerage Accounts if I use Fidelity QUESTION

If I transfer my Solo 401k account from Vanguard to a MySolo401k account and decide to set up a Fidelity brokerage account how would that account be registered (I currently have a pre-tax and Roth 401k account at Vanguard)? How would I fund the account after the transfer of initial funds? Would I do that by logging into the Fidelity account and initiating an ACH bank transfer? How would I make redemptions once over 59.5? What statements would Fidelity provide versus what MySolo401k would provide?

When transferring a Solo 401k account from Vanguard to MySolo401k and setting up a new Fidelity brokerage account, the account would be registered under the Solo 401k owner’s name. We assist in preparing all necessary paperwork for opening new accounts at Fidelity and for transferring cash and assets from the existing Vanguard accounts to the new Fidelity accounts. Solo 401k owners have exclusive access to their accounts at Fidelity. Funding after the initial transfer can be done by logging into the Fidelity account and initiating an ACH bank transfer. For redemptions post age 59.5, withdrawals can be made via check or wire, and these transactions are reportable events which we handle by providing the necessary 1099 reporting at no additional charge. Fidelity would provide regular brokerage statements, while MySolo401k would provide the ongoing Solo 401k compliance spport.

Ongoing Solo 401k Contributions QUESTION

The additional contributions will be made directly to Fidelity NOT my401K.net?

Correct, the ongoing solo 401k contributions will be made directly to the Fidelity brokerage accounts by you as the trustee of the plan and they can be made electronically (ACH) from your business bank account. We don’t hold our clients funds; instead, the client decides on the depository financial institution to hold the solo 401k funds.

Contribute Now or Later QUESTION

I already made some contributions for 2024 to my Vanguard i401k. Should I max and then transfer or is it ok to transfer and then max contributions for the year?

Yes,  you can and by your business tax return due including your business tax return extension.n max out the contributions now or after you have restated your solo 401k plan. 

Multiple Contributions QUESTION

I want to confirm that I can make multiple contributions throughout the year if I wish?

Yes, you can and by your business tax return due including your business tax return extension.

Tracking Contributions QUESTION

Who is keeping track of how much has been contributed and of what type throughout the year?

The solo 401k holding accounts (the bank/brokerage accounts) serve to track the contributions in addition to reporting them on your personal and/or business tax return

Stock and Fund Trading QUESTION

I'm assuming if I want to change investment elections within Fidelity, I do that through the Fidelity website?

Correct. Whether your use Schwab or Fidelity ivnestments, for example, for the solo 401k brokerage accounts, you would use that brokerage firms website and only you will have access to the solo 401k funds. 

Locating the i401k Original Plan Effective Date QUESTION

Start date & plan # of current plan- My current plan(s) are with Vanguard. Can you please tell me how I find out original start date and plan #'s? If I ask Vanguard can they easily tell me that information?

You can  locate the original plan effective date from the Vanguard i401k application (aka Adoption Agreement), or by calling Vanguard. Also, if your plan has been filing a Form 5500-ez, you can get the original plan effective date from 1c for that form.   

In-Plan Roth Conversions Vanguard QUESTION

I will be moving my Individual Solo 401k-traditional and Roth- from Vanguard soon. I wanted to find out more details of how a in-plan traditional to Roth conversion is done under your plans. What are the mechanics, costs, how is the taxable gain are tracked for tax payments?

The solo 401k that we offer allows for the funds to be held in separate brokerage accounts at Fidelity or Schwab, for example. 
 
For example, if the solo 401k plan only has one participant, 1 (one) to 3 (three) separate bank or brokerage accounts may be needed depending on whether or not the participant chooses to make all three contribution types (pretax, roth and voluntary after-tax) or chooses to convert pretax or voluntary after-tax funds to the Roth solo 401k bucket.
Subsequently, you can convert the pre tax solo 401k funds to the Roth solo 401k through an in-plan conversion where the funds and/or securities are internally moved from the pre tax solo 401k brokerage account to the Roth solo 401k brokerage account.  You would then complete our in-plan conversion form (https://www.mysolo401k.net/pretax-to-roth-solo-401k-in-plan-conversion-form/) so that we can collect the necessary information to issue the Form 1099-R.
 
See the following procedure for example if you use Fidelity Investments for the solo 401k brokerage accounts. https://www.mysolo401k.net/solo-401k/how-to-process-a-fidelity-investments-conversion-of-pretax-solo-401k-funds-non-prototype-account-to-a-roth-solo-401k/
 

$1,500 Solo 401k Plan Credit QUESTION

Your site says that your account supports auto contributions to allow me to take the $1,500 tax credit. How is that setup? Is that done through fidelity as an automated ACH purchase from my associated bank account? or some other way?

The auto contribution feature in our Solo 401k plans is set up to allow Solo 401k owners to qualify for a $1,500 tax credit. The Solo 401k owner can opt out of the default contribution amount in order to allow the Solo 401k owner to contribute at any amount or schedule they prefer, or even opt not to contribute at all, and still be eligible for the tax credit. 

Employee and Employer Roth Solo 401k Contributions QUESTION

Does your plan support Employee and Employer Roth contributions?

Yes, our Solo 401k plans support both Employee and Employer Roth contributions, as well as voluntary after-tax contributions which can be utilized for Mega Backdoor Roth strategies.

Pro Rate Rule QUESTION

Your site says that your plan supports voluntary after-tax solo 401k contributions and then supports mega backdoor Roth conversions. How will the Pro Rate rules apply to these conversions if I have existing money in the traditional solo 401k account and I also have other traditional IRAs?

For Solo 401k plans, the pro-rata rules apply at the account level. This means that Solo 401k owners can move money from their voluntary after-tax Solo 401k sub-account to a Roth Solo 401k or Roth IRA, even if they have other pre-tax or Roth funds in their Solo 401k. Click here to learn more. 

Rollovers Out of the Plan QUESTION

Does your plan support rollovers out of the plan to a regular or Roth IRA?

Our Solo 401k plans support rollovers out of the plan to both regular and Roth IRAs, provided the rollover requirements are met, such as the Solo 401k owner being over age 59.5 or meeting other triggering events or exceptions like voluntary after-tax contributions. We handle the required 1099-R reporting as part of our service at no additional charge. Click HERE to learn more. 

EIN for solo 401k Plan QUESTION

I already have a business EIN associated with the current account. Would I require another EIN for the plan trust?

Yes, you would need to obtain a separate EIN specifically for the Solo 401k plan trust, even if you already have an EIN for your existing business. We would obtain the EIN for the solo 401k as part of the restatement process. Having a separate EIN for the Solo 401k plan helps the IRS clearly identify which funds and income are associated with the tax-deferred retirement account versus your taxable business incom. When income like interest is reported to the IRS under the Solo 401k plan’s EIN, it signals to the IRS that this income is growing tax-deferred within the retirement account.

Use Schwab for the solo 401k Brokerage Accounts QUESTION

I would be interested in moving my accounts to Schwab. Do you open one or separate accounts at the new custodian?

When opening brokerage accounts at Schwab for your Solo 401k, you will typically need to open multiple brokerage accounts rather than just one account. Each brokerage account is opened in the name of the solo 401k using the plan’s EIN and used for tracking different contribution sources – one for pre-tax funds, one for Roth funds if applicable, and one for voluntary after-tax funds if applicable. This setup of separate Schwab brokerage accounts for each participant and contribution source (pre-tax, Roth, after-tax) is how the different Solo 401k contribution types are properly tracked and accounted for. If applicable, your spouse would also need their own separate participant account if they are a participant in the Solo 401k plan. We would assist in opening each brokerage  account at Schwab as part of the solo 401k setup process. 

If we hire a w-2 employee part time, will we need to adjust our Solo401K plan?

If you hire a W-2 employee part-time, you will not necessarily need to adjust your Solo 401k plan, provided that the employee does not meet certain criteria that would require inclusion in the plan. Specifically, a business can have W-2 employees and still maintain a Solo 401k plan as long as no W-2 employees work 1,000 hours per year with 1 year of service or 500 hours per year for 3 consecutive years (2 consecutive years starting in 2025 per SECURE 2.0 Act).

It’s important to note that contractors in your business may be excluded from the Solo 401k plan regardless of the number of hours worked.

However, if at any point you hire a full-time employee, you will no longer be eligible to maintain a Solo 401(k), and it’s crucial to get in touch with your plan provider to discuss your options at that time.

Solo 401k Tax Credit: Why can’t I add the auto-enrollment feature to my Solo 401k at Fidelity/Schwab/E-Trade/Vanguard so that I am eligible to claim the credit?

Many Solo 401k account holders with plans at discount brokerages at Fidelity, Schwab, E-Trade, Vanguard, etc. are asking how they can modify their Solo 401k plan to add the auto-enrollment feature (Eligible Automatic Contribution Arrangement or “EACA”) so that their self-employment business would be eligible for the Solo 401k Tax Credit.

This post explains why it’s not possible to simply “check the box” to add the auto-enrollment feature to be eligible to claim the credit.

Q: What is the Solo 401k Auto-Enrollment Tax Credit?

A: The Solo 401k auto-enrollment tax credit is part of the incentives introduced under the SECURE Act 2.0 to encourage small businesses to adopt retirement savings plans that automatically enroll participants. Eligible businesses can claim a tax credit of $500 per year for up to three years for adding an auto-enrollment feature to their Solo 401k plans.

Q: Can I simply modify my existing Solo 401k plan documents at Fidelity, Schwab, E-Trade, or Vanguard to add the Auto-Enrollment Feature?

A: In short: no.

First, based on a review of the published Solo 401k adoption agreements at Fidelity, Schwab, E-Trade, or Vanguard none of the adoption agreements include the auto-enrollment feature as an option that could be selected by the Solo 401k account.

Moreover, adding the auto-enrollment feature requires that additional notices and forms are provided and none of the discount brokerages provide the required forms.

Therefore, in order to properly add the feature to be eligible for the Solo 401k tax credit one would need to restate their plan to a Solo 401k plan like the one offered by My Solo 401k Financial which will not only include the feature in the plan documents but also include the additional required notices and forms.

ProviderSupports Auto-Enrollment ModificationEligible for Tax CreditAdditional Notes
FidelityNoNoPrototype plans with limited customization
SchwabNoNoPrototype plans with limited customization
E-TradeNoNoPrototype plans with limited customization
VanguardNoNoPrototype plans with limited customization
My Solo 401k FinancialYesYesOffers customizable plans that support auto-enrollment

Roth IRA vs 401k: Where Should I Transfer My Mega Backdoor Roth Solo 401k?

If you have a solo 401k and are making voluntary after-tax contributions, you have a great opportunity to supercharge your retirement savings through a Mega Backdoor Roth Solo 401k. But when it comes time to transfer those funds, should you move them into a Roth IRA or Roth 401k?

Top Considerations in Deciding Where to Transfer Mega Backdoor Roth Solo 401k

  • Withdrawal flexibility: With a Roth IRA, you can withdraw contributions anytime tax- and penalty-free. Roth 401ks require a triggering event like reaching age 59.5.
  • Required minimum distributions (RMDs): Starting in 2024, neither Roth IRAs nor Roth 401ks have RMDs. Previously, only Roth IRAs avoided RMDs.
  • Loans: You can’t borrow from a Roth IRA, but you may be able to take a loan from a Roth 401k if your plan allows it (like our Solo 401k plan does).
  • Unrelated debt-financed income (UDFI) tax: If your Roth IRA uses debt to invest in real estate, that income may be subject to UDFI tax. Solo 401ks are generally exempt from UDFI on income debt-financed Solo 401k real estate investments.
FactorRoth IRARoth 401k
WithdrawalsContributions can be withdrawn anytimeTriggering event like age 59.5 required
RMDsNever requiredNo RMDs starting in 2024
LoansNot allowedMay be allowed if plan permits
UDFI taxMay apply to debt-financed real estate incomeExempt for debt-financed real estate

Consider Different Use Cases

  1. Early Retiree: If you plan to retire before 59.5, having your funds in a Roth IRA provides more flexibility to access contributions if needed without worrying about triggering events.
  2. Real Estate Investor: If you want to use retirement funds to invest in debt-financed real estate, keeping the money in your solo Roth 401k generally avoids UDFI tax that may apply in a Roth IRA.
  3. Alternative Investments: With a self-directed Solo 401k plan that allows for alternative investments (such as real estate, private placements, cryptocurrency, precious metals, etc.), many will choose to transfer voluntary after-tax solo 401k funds to a Roth Solo 401k to preserve the ability to invest in such investments (as opposed to transferring after-tax solo 401k funds to a Roth IRA at a discount brokerage such as Vanguard, Fidelity, etc. that doesn’t allow for such investments).
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