Solo 401K Setup & Lessons Learned

Most of my posts are technology related. In this one, I want to share my experience with setting up a Solo 401K and my lessons learned.

Why Bother?

  • Tax Savings. Up to $53,000 can be saved in income taxes. $18,000 from employee contributions and up to $35,000 from employer contributions in 2016. Employer contributions are limited to 25% of employee wages for an S-Corp so if I pay myself say $40,000, the employer contributions are limited to $10,000.
  • Investing Flexibility. The vast majority of 401Ks offer mutual funds only. Depending on the 401K provider selected, you can get all the investment options that they offer and this varies widely. I ended up selecting Fidelity using an Investment Only Plan with complete check writing control. This allows me to invest in traditional investments like stocks, bonds, mutual funds and ETFs or more exotic investments like buying real estate.
  • After-Tax, Non Roth contributions. Depending on how much salary one pays themselves and how much revenue the business earns, the employer contribution may be rather limited and if you can contribute more, an employee can contribute after-tax, non roth contributions that aren’t subject to the regular $18,000 employee limit. This is helpful in the Mega Backdoor Roth Strategy. My plan is to invest pretax whenever possible but have this as an option as needed.


Aside from technology, business, finance, and personal finance are other subjects I’m very passionate about. I like to learn all the nitty gritty details about things. I knew a fair bit about the financial aspects of 401Ks but not the administrative and compliance side of things. Those are very complicated.

It all starts with the 401K Plan Documents. These documents list all the different options that are allowed by law and you select the options you’d like to have. For example, do I want to offer Pretax only accounts or Roth and After-Tax accounts too. Do I want to offer matching employer contributions, profit sharing contributions, or perhaps a Safe Harbor non-elective employer contribution.

After the options are selected, they have to be administered and followed. There are also various compliance and reporting requirements to keep your 401K’s tax advantaged status. For example, if you have employees, you must send them 401K reports periodically and depending on options selected, you have to do Highly Compensated Employee (HCE) testing to ensure that all employees are being treated fairly. With employees, there’s also tracking desired contribution amounts to be withheld from payroll, deciding which investment options to offer, and allowing them to manage their investments.

All of this is very time intensive and requires in-depth knowledge. This is why many companies outsource it to a third party administrator (TPA) who will handle 401K setup and administration or some combination. As you can imagine, this can be expensive.

As the sole employee of an S-Corp, I am eligible for a Solo 401K that isn’t subject to HCE testing and many other things. If I ever hire someone, then I will be. Since Solo 401Ks are fairly simple compared to a “Traditional” one, many providers offer them and they can be really cheap depending on what they offer.

The first provider I asked quoted me $1500 for setup, a $55 monthly maintenance, and then 0.45% of plan assets annually but they would take care of everything for me. Since I plan on doing everything myself, for now anyway, and need advice when needed, this was more than I was willing to pay at this time.

Next, I looked at Vanguard because I’m a big fan of Jack Bogle and passive index investing. Their i401K offering looked attractive at first because they only charge $20 per mutual fund selected per year. However, they only let you invest in a “Pretax” account, only let you invest in “investor” level mutual funds that charge higher expense ratios, and don’t do any 5500 reporting for you.

After more investigation, I decided to go with My Solo 401k. They’re a TPA that does 401K setup and plan documentation administration services. Their website is very thorough. They charge $795 for the first year and $125 per year afterwards. When I called I spoke to the owner and his colleague and they’re awesome. They are experts, answered all my questions, and did most of the setup for me. They helped me setup Non-Prototype 401K investment accounts at Fidelity for Pretax, Roth, and AfterTax 401K accounts where I have complete control over what I invest in and Fidelity doesn’t charge for having accounts with them! Their regular trading fees and mutual fund fees do apply.

Lessons Learned

  • Learn what’s involved with having a 401K and the tradeoffs so you can select a provider that will have provide the right amount of services for your desired level of outsourcing and price point.
  • 401K employee contributions have to be done within the calendar year but employer contributions can be made up to March 15th of the following year. This later deadline gives additional flexibility for employer contributions.
  • Profit Sharing! An employer can elect to contribute non-matching amounts to the 401K in addition to matching or Safe Harbor contributions. They can even do this even if they have no profit but it’s not recommended. For the time being, I’ve elected to only have profit sharing as the only employer contribution option so I can contribute however much I’d like whenever I’d like up to the dealine on the employer side up to the employer limit.
  • If you hire employees, things are more complicated and would recommend hiring a full service TPA.
  • Depending on the 401K custodian, the available investment options vary greatly. With my self-directed 401K, I can invest in real estate, tax liens, and other alternative investment options in addition to traditional investments like stocks, bonds, mutual funds, and ETFs.
  • Employer contributions are always pretax. They can not be Roth or after-tax, non roth contributions.
  • Employer contributions are considered a business expense and can be deducted from income taxes. They’re also not subject to employment taxes even though employee contributions are! Put differently, you transfer money from your business checking account into your Pretax 401K employee account and then get to deduct that amount from your income taxes.
  • In 2017, the employee contribution limit remains the same at $18,000 but the employer contribution limit increases by $1,000 to $36,000 for a total contribution limit of $54,000.

What was your experience setting up a Solo 401K or other employer retirement plan? What other things did you learn?

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