I have a W2 job but recently started earning around $12K a year from a side gig. I already max out my 403b and 457b through my main job. My side gig income will likely stay between $10K and $15K a year for the foreseeable future.
I’m thinking about opening a solo 401k to make employer contributions and maybe take advantage of the mega backdoor Roth option later. Is it worth it, or is it too much hassle with fees and paperwork?
What fees are you talking about? If you go with Schwab, there are no fees, and you don’t have to file anything until the plan assets hit $250,000. If you’ve got the cash, reducing your side gig income for tax purposes makes sense.
@Jamie
I heard Schwab requires deposits to be mailed in with checks or money orders unless you already have a brokerage account with them, which I don’t. Also, you have to mail in the application, which might make it hard to meet the deadline for this year.
I’m also looking for a solo 401k that allows for mega backdoor Roth contributions, which I don’t think Schwab supports.
@Kei
If you’re a sole proprietor with no employees, you actually have until April 15, 2025, to set up a solo 401k for 2024. This change came with SECURE 2.0.
Jai said:
@Kei
If you’re a sole proprietor with no employees, you actually have until April 15, 2025, to set up a solo 401k for 2024. This change came with SECURE 2.0.
Wow, is that true? Yes, I’m a sole proprietor with no employees. I thought the deadline was the end of the calendar year to set up and contribute for 2024. I’ll check this out, thanks!
@Kei
Here’s the info from Schwab:
SECURE 2.0 allows you to set up the plan and make retroactive contributions until your tax filing deadline. If you already have a Schwab account, they can process applications quickly. I added a Roth option to my solo 401k, and they had it done in a day.
@Kei
If you can’t make the deadline this year, why stress? Look into other providers like Fidelity or Vanguard. You could also consider a SEP IRA for now since it gives you more time.
Jamie said:
@Kei
If you can’t make the deadline this year, why stress? Look into other providers like Fidelity or Vanguard. You could also consider a SEP IRA for now since it gives you more time.
I’d prefer to avoid a SEP IRA because of the pro-rata issue with backdoor Roth contributions, which I do.
There are free solo 401k providers, but they don’t allow mega backdoor Roth contributions. Plans that do offer this feature usually charge a few hundred dollars a year. Whether it’s worth it depends on your income and tax situation.
A solo 401k is more work than a SEP IRA, but SEP IRAs have the pro-rata rule for backdoor Roth contributions. You could get around this by rolling the SEP IRA into your 403b, but it’s something to think about.
Also, keep in mind the special aggregation rule for 403b plans. You control both the 403b and your solo 401k, so they have to meet contribution limits both separately and combined.
@Jai
Thanks for explaining. I’m in a high tax bracket, so I’m looking for ways to lower my taxes. The free solo 401k options don’t allow after-tax contributions, so I was considering the custom plans that do but have fees.
I’ll also read more about the aggregation rule. Good to know.
You’re already maxing out a 403b, 457b, and Roth? Wow, I need your income!
Avery said:
You’re already maxing out a 403b, 457b, and Roth? Wow, I need your income!
It takes a lot of hard work!
Check out Carry for an all-in-one option, or look into MySolo401k and Fidelity. If your side income lasts 5-10 years, it’s worth it. For just a year or two, probably not. Avoid a SEP IRA because the pro-rata rule is a pain.
@Brian
Yeah, I’m definitely avoiding the SEP. I’ll check out Carry—the interface looks nice, but their fees seem higher than MySolo401k.
Your solo 401k contributions are based on your side gig income. Is it worth setting up for that amount?
Discount brokerages don’t include mega backdoor Roth options in their basic solo 401k plans. But their plans are affordable and easy to manage. If you’ll use the extra tax-advantaged space, go for it. I’m guessing your tax rate is on the higher side.
If you’re maxing out your main job’s 401k or 403b, you can’t contribute from your side business income. You could look into a SEP IRA or profit sharing, where you can contribute 20% of your profits.
Why not just use an IRA instead of a solo 401k?