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  • Solo 401k

    I work at a company that provides a regular 401k. Can I open a solo 401k? The purpose is, as I expect myself switching jobs a few times in my life (still at an early stage of my career), and want to consolidate all the former (and future former) employers 401k into one place.

    I don't want to do an IRA because once I have pre-tax money in a traditional IRA, it becomes less tax efficient to do the back door Roth IRA conversion.

    I try not to roll them into my current employer's 401k because

    1. The investment options in there are fewer than at a brokerage firm, say Charles Schwab

    2. Once I roll it in, it's harder to roll it out until I leave the company


    Would this be a solution - I have a condo that I need to rent out anyways. If start a company as a shell, which only holds this rental property and has some rental income. Then I can claim some self-employ income and therefore I can open a solo 401k.

    I'm fairly familiar with the usual tax-efficiencies of 401k and IRAs, but have almost no knowledge about owning a company and its tax implications.

  • #2
    Your reasons for not r/o into your employer's plan are valid.

    Unfortunately, rental income is "passive" and does not qualify as the "earned" income you need to contribute to a retirement plan. Find a way to do some IC work, then you can open a SOLO-k. I see you are not a physician, so it may be a little more difficult. If you start a side business, you need to know that the contribution to the SOLO-k is based on "net" profits, not "gross" income, so it needs to be profitable. Can you do some consulting work?
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      I don't have plan to do consulting as of now, but let's say I have some consulting income in one year, would that qualify me for a solo-k account and then can I convert all my former employer's 401k into this solo-k even if I do no more consulting work going forward?

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      • #4




        I don’t have plan to do consulting as of now, but let’s say I have some consulting income in one year, would that qualify me for a solo-k account and then can I convert all my former employer’s 401k into this solo-k even if I do no more consulting work going forward?
        Click to expand...


        That is correct.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Thanks!

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          • #6
            lol, please ignore my "like" on my own post - that was supposed to be for The Wall Street Doctor ops:
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7




              I try not to roll them into my current employer’s 401k because

              1. The investment options in there are fewer than at a brokerage firm, say Charles Schwab

              2. Once I roll it in, it’s harder to roll it out until I leave the company


               


              This is very often not the best choice.

              1. It is not the number of choices that matters, but rather the costs. These days many 401k plans have more than enough low cost options. This is not to say that there are not still many plans with expensive options. Physicians historically have been one of the groups that under perform the market the most. One of the main reasons the White Coat Investor started this website.

              2. The majority of 401k plans that allow you to rollover prior 401ks, allow in-service rollovers of those assets to another retirement plan.

              3. Most importantly. A one-participant 401k is not an ERISA protected plan and does not have the asset protections of a true employer 401k plan.


              You may have either a previous or current 401k with very expensive options. In that case, it may make sense to generate self-employment income in order to open a one-participant plan. Just don't do it for the wrong reasons. One participant plans are far more likely to have rollover restrictions than employer plans.

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              • #8


                It is not the number of choices that matters, but rather the costs. These days many 401k plans have more than enough low cost options. This is not to say that there are not still many plans with expensive options. Physicians historically have been one of the groups that under perform the market the most. One of the main reasons the White Coat Investor started this website.
                Click to expand...


                Totally agree and thanks for the reminder. Low cost is essential. Are you saying a solo-401k would likely to only have very expensive options? I would assumed if I opened a solo-401k with any brokerage firm like Vanguard or Schwab, I should be able to buy all the low cost funds on their platform, no?

                 


                The majority of 401k plans that allow you to rollover prior 401ks, allow in-service rollovers of those assets to another retirement plan.
                Click to expand...


                You mean after I roll my previous 401k to my current employer 401k, I can later roll that portion out to somewhere else even if I am still employed with this firm?

                 


                Most importantly. A one-participant 401k is not an ERISA protected plan and does not have the asset protections of a true employer 401k plan.
                Click to expand...


                What asset protections does a true employer 401k plan provide?

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                • #9




                  Totally agree and thanks for the reminder. Low cost is essential. Are you saying a solo-401k would likely to only have very expensive options? I would assumed if I opened a solo-401k with any brokerage firm like Vanguard or Schwab, I should be able to buy all the low cost funds on their platform, no?


                  No, solo 401k plans at low cost providers have very competitive expense ratios. What I was referring to is that not all employer plans have expensive options. In fact some employer plans have expense ratios <= those available for solo 401k plans. In these cases it may be preferable to keep it in that employers plan.






                  You mean after I roll my previous 401k to my current employer 401k, I can later roll that portion out to somewhere else even if I am still employed with this firm?




                  Yes. IRS regulations do not allow in-service withdrawals/rollovers of employee deferrals prior to age 59 1/2. Many plans that allow incoming rollovers also allow in-service withdrawals/rollovers of those assets at any time.








                  What asset protections does a true employer 401k plan provide?
                  Click to expand...


                  ERISA provides what is know as anti-alienation protection against creditors. This protects against any creditors, judgments, etc... both inside and out of bankruptcy. What this mean for white coats is that a malpractice judgement can not attach an ERISA plan.

                  Non-ERISA plans include many 403b plans, 457b plans, and IRAs. Owner retirement plans (SEP IRA, SIMPLE IRA and solo 401k) that do not include at least one non-owner/non-spouse participant are also not ERISA plans.

                  Without ERISA there are federal bankruptcy protections, but this does not extend to creditors outside of bankruptcy. For non-ERISA creditor protection you have to go to state protection. The good news is that about 45 states protect IRAs and about 40 states protect Roth IRAs.

                  The bad news is that in some states (notably CA), retirement plan protections are limited to only a level necessary to provide a reasonable lifestyle. Note: The lifestyle they are referring to is not a reasonably wealthy white coat lifestyle.

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                  • #10
                    Interesting spiritrider I did not know that about the ERISA issue thanks

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