I've been doing my research over the last few months on the best solo 401k providers for small businesses and side hustlers like myself. I've shared in the past the best options for saving for retirement with a side income, and I've leveraged a SEP IRA in the past.
However, as the side business income has grown, a solo 401k is a better option for sheltering more money for retirement tax free today. One of the big reasons I've opted for a SEP IRA in the past is that it's very easy to setup and my income wasn't really high enough to justify a solo 401k. Today, however, I'm willing to accept a little more paperwork to save a lot more in taxes.
Why A Solo 401k
You might be asking why I'm considering a solo 401k versus a SEP IRA or other self employed retirement savings options. Well, it all comes down to circumstance and how much you can save.
Let's look at two scenarios that are similar to mine. First, in the past, I only saved in a SEP IRA because my income was lower and I was still maxing out my 401k at work, so I didn't need any additional employee contributions.
With both a SEP and Solo 401k, on $30,000 of income, the employer contribution is $5,576.11. Since I was already doing the $18,000 at my primary employer, that amount didn't make a difference.
However, fast forward to today, the business makes much more income, and my wife is now working for the business. As such, it can make a huge difference in savings and lowering our taxes. Let's assume that the business is going to make $100,000 this year. That means that the business can contribute $18,587.05 to both my 401k and my wife's 401k. Plus, my wife can contribute $18,000 of her salary to the 401k as well (since I still make my $18,000 at work).
As such, the solo 401k provides much more savings options, and lower taxes today as a result.
What To Look For In A Solo 401k
Going through the process of shopping around for a solo 401k provider, I've learned a lot about what to look for. There are a lot of options and nuances that you should look for when shopping for a 401k. Many of the "free" providers offer simple generic plans, and if those don't work for you, you can have a third party provider create a custom 401k plan for your business, which you can then take to a brokerage.
Whoa, that sounds confusing, and it can be. So let's look at the major options that you need to consider when selecting a solo 401k provider.
- Does the 401k provider offer both Roth and Traditional contributions?
- Does the 401k provider offer loans from the plan?
- What types of investment options are allowed in the plan?
- Does the provider allow rollovers into the plan and rollovers out of the plan?
- The costs to maintain the plan
- The costs to invest within the plan
Based on your wants and needs, there are a lot of things to compare when shopping for a solo 401k provider. Let's compare some of the main firms that offer solo 401ks. We're going to start with the 5 major firms that provide Prototype Plans. These are the "free" plans that the companies advertise.
Fidelity Solo 401k
Fidelity has been my go-to investment brokerage for years because they offer a wide variety of products and services at very low prices. In fact, it's where I manage all of my investments today.
So I was disappointed to learn that Fidelity doesn't offer a full service solo 401k option. Their current "free" solo 401k doesn't offer a Roth contribution option, and it doesn't offer 401k loans. Speaking to their representative, they told me this was to save costs on maintaining the plan since they don't charge to setup a solo 401k.
However, because it is Fidelity, they do offer a full range of investment options, from commission free ETFs, to mutual funds, stocks, bonds, and more.
Fidelity also offers rollovers into the plan, which can be a great strategy for doing a mega backdoor Roth IRA.
The Fidelity solo 401k is cheap. There are no setup fees or annual maintenance fees. And trading within the Fidelity solo 401k is the standard $7.95 commission.
Learn more about the Fidelity Solo 401k here.
Vanguard Solo 401k
Vanguard is one of the most popular solo 401k options because Vanguard has always been synonymous with low fees. As such, I expected them to be a very low cost provider.
Vanguard does offer Traditional and Roth options for their solo 401k, but I was surprised to learn that they do not allow rollovers into their solo 401k plans, and they don't allow loans from their plan.
Vanguard only allows participants in their solo 401k to invest in Vanguard mutual funds (not even Vanguard ETFs). This limits investment options quite a bit.
The fees on Vanguard's solo 401k were also surprising. While they don't charge a setup or annual maintenance fee, they do charge a $20 per fund per year fee for each fund you hold inside your 401k plan. That means if you hold 5 funds inside your solo 401k, you could be paying Vanguard $100 per year.
This $20 per fund per year fee is waived if you're Flagship Select or Voyager Select. This means you need to have at least $50,000 in assets with Vanguard.
Learn more about Vanguard Solo 401k here.
Charles Schwab Solo 401k
Schwab is another discount brokerage that offers a prototype solo 401k plan for free. Since Schwab is continually working to improve their image in the low-cost brokerage space, I was interested to see what they offered.
I was disappointed to learn that Schwab only offers traditional 401k contributions - they do not have a Roth option on their plan. They also do not offer loans under their plan.
It appears that you can rollover a 401k into your Schwab solo 401k, but you cannot do an IRA rollover.
Schwab does offer a lot of investing options, including Vanguard mutual funds and commission free ETFs.
There are no fees to open the solo 401k, and there are no yearly maintenance fees. Inside the 401k, traditional Schwab pricing applies - $8.95 per trade, with $0 on Schwab funds and ETFs.
Learn more about Charles Schwab Solo 401k here.
E-Trade Solo 401k
When I started looking for solo 401k options, E-Trade wasn't really on my mind. I think of them as a trading brokerage, as their fees on many products are higher than I would want. However, a friend of mine said good things about their solo 401k option, so I checked them out.
And honestly, I was impressed. E-Trade offers both Traditional and Roth contributions to their solo 401k. They also allow loans under their plan.
They accept rollovers of any kind into the plan, and you can even setup your plan to allow in-service rollovers out of the plan (that's rare, even for traditional 401ks).
There are no setup fees involved with setting up a solo 401k at E-Trade. Inside the 401k, you're subject to the regular commissions at E-Trade, which is currently $9.99 per trade. However, they do offer a large amount of no-fee mutual funds.
Learn more about E-Trade Solo 401k here.
TD Ameritrade Solo 401k
TD Ameritrade is another low cost brokerage that offers a prototype free solo 401k plan. Their plan is the hardest to dissect, but here is what we could gather. However, after discussing their plan with them, here is what we found.
The TD Ameritrade solo 401k plan does allow both traditional and Roth contributions. They also allow loans from their solo 401k plan. We couldn't get a clear answer on what types of rollover options they allow into and out of their solo 401k plan.
They also offer a lot of investment choices within their 401k plan. For example, they offer Vanguard ETFs commission free.
There are no setup fees or annual account fees with TD Ameritrade's plan. All regular trades within the 401k are subject to their standard commission with is $9.99. However, even beyond the Vanguard ETFs, they offer other ETFs commission free as well.
Learn more about the TD Ameritrade Solo 401k here.
Comparing The 5 Most Popular Solo 401k Providers
Now that we've covered the five major "free" solo 401k providers, let's compare them in a chart side-by-side to see how their offerings compare to each other.
Comparing The Most Popular Solo 401k Providers
Annual Cost To Maintain
Cost To Invest Within 401k
Now you can see why the choice of solo 401k providers is so difficult. Each firm has strengths and weaknesses, and the selection depends really on what matters to you.
And if none of these really excite you, you can always create your own solo 401k with a third party provider.
Third Party Solo 401k Providers
If you need something a little more robust that the free prototype plans these five brokerage firms offer, then you need to find a third party service that will create the plan documentation for you.
Some of the common reasons why you'd consider using a third-party service to create your solo 401k documentation:
- You want a choice in brokerage
- You want to invest in alternative assets such as real estate, promissory notes, tax liens, precious metals, and more.
- You want checkbook control over your 401k
- None of the prototype providers matches exactly what you're looking for with options
We're not going to go in-depth on these providers because this section effectively becomes al-la-carte with what you can get and pay for. I just wanted to list some of the most popular third party plan providers that you can reference in your search for the best plan.
Remember, just because you go with a third party provider also doesn't mean you can't invest at your favorite firm. For example, you can create a third party solo 401k and then have that 401k held at Fidelity. This gives you access to all of Fidelity's investment choices, but your options are created by the plan, and NOT Fidelity.
This isn't an exhaustive list. There are also local firms in most areas that can create 401k plan documentation as well.
Some of the most popular online providers include:
- Ubiquity - They offer a customizable plan starting at $215 per year
- My Solo 401k - They can create a custom plan for $795 plus an annual fee of $125
- Accuplan - They offer a lot of services but are not transparent in pricing
If you're considering a solo 401k for your small business or side business, really consider the benefits that are important for you.
For me, having a Roth option was very important because I want to be able to get tax diversification when I retire (I'm looking to have a lot of pre-tax money, and having post-tax money will be nice). I also want to have low costs but a lot of investment options.
As such, I'm leaning towards E-Trade for my solo 401k, but I'm also looking at third party providers for options and pricing.
If you have a solo 401k, where did you choose to have it? Why? What features are most important to you?