Vanguard Solo 401k Plan: 5 Critical Strategies [Template]


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Vanguard is a favored custodian in the small business retirement space. For many companies we work with, it’s their #1 choice.

But is a Vanguard solo 401k plan the right plan for your business? In this post, we will offer up some of our top strategies that will allow you to get the most from your plan.

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Benefits of a Vanguard Solo 401K

Working for yourself has its benefits, especially in today’s volatile economy. But there’s one area that many feel it lacks – saving for retirement.

When you don’t have an employer-sponsored 401K, you may feel like it’s impossible to save for your golden years with the small limits placed on a traditional or Roth IRA. Fortunately, there’s an answer – the Solo 401K.

As the name suggests, the Solo 401K is only for individual business owners. If you have employees, you won’t qualify. It’s strictly for solo-business owners that want to save for retirement while realizing the same tax benefits employees with sponsored 401K accounts have.

The solo 401K has many benefits, most importantly and obvious is the ability to save for your retirement as an entrepreneur. You don’t have to be a specific age, and in fact, if you are over 50-years old, you can make catch-up contributions that exceed the already high maximum contribution allowances.

self employed

In 2020, you may contribute a maximum of $57,000 per year. This includes your contributions as an individual as well as contributions as an ‘employer.’

If you are over 50-years old, you are allowed to contribute an extra $6,500 per year too. Like most other traditional retirement accounts, including the traditional 401K and IRA, you contribute the funds pre-tax.

The money grows without tax liabilities as well – it’s when you withdraw the funds in retirement (at least age 59 ½) that you pay taxes. At that point, hopefully you are in a lower tax bracket and will pay fewer taxes.

How do They Work?

When you set up a Solo 401K, you are both the employee and the employer. In other words, you make both contributions, but one comes from your earnings and the other from your profit-sharing.

Employees (you) can contribute as much as $19,500 per year toward your retirement account. If you make less than $19,500, you may contribute 100% of your earnings and again, if you’re over 50-years old, you may contribute the extra $6,500.

What is the difference between a cash balance plan and a defined benefit plan?

You also contribute as the employer. This money comes from your company’s profit sharing. You’ll need the following equation to determine how much you may contribute as the employer:

  • 25% x you earned income – ½ of your self-employment tax
  • The maximum contribution is $57,000 as an employer.

Why Choose a Plan?

There are many options for setting up a Solo 401K account, but Vanguard offers a great option for side hustlers and those that own their own business.

Vanguard doesn’t charge a setup fee for the account, but they do have some limitations. For example, you can’t take a loan on your money, no matter the balance. The only way you could access your funds early is with a hardship withdrawal before the age of 59 ½, but you must qualify for it. This is also consistent with an owner-only plan.

Vanguard does charge some trading fees, but they are minimal and some are avoidable. Most commonly, investors pay a $20 per fund annual fee. If you have several funds, you’ll pay the fee for every fund you have, which can take away from your profits, so keep that in mind when choosing your investments.

Vanguard Solo 401k Plan Document

Starting a Solo 401K at Vanguard is easy. If you are already a Vanguard client, you can set the account up online by logging into your account and choosing Individual 401K. If you don’t have an account with Vanguard right now, you must call 1-800-992-1788 and a representative will walk you through the process.

Before you can apply for a Solo 401K, you’ll need an Employee Identification Number. You get this number directly from the IRS and it only takes a matter of minutes as they provide it to you instantly. Head to the IRS website and complete the required information to get your EIN.

chart with finance, tax and debt

Beyond the EIN, you’ll need to sign a few Vanguard documents, which they will send to you. You’ll need to sign them and send back the originals, but make sure you keep a copy for yourself.

As a part of the process, you’ll also need to choose a plan administrator. Many business owners choose to handle it themselves, but if you don’t want the responsibility, you can assign it to your spouse or your accountant (or anyone else you designate).

Roth Contributions

You do have the option to open a Roth Solo 401K. If you do choose this, you contribute the funds after taxes. Just like the traditional Solo 401K, the money grows tax-free. However, the difference occurs when you withdraw the funds as your earnings grow tax-free. In other words, you don’t owe taxes on your earnings.

Vanguard requires all contributions to be made online. The entire process takes about 2 weeks to complete. Once your account is set up, you can make contributions.

If you want them to count for the year, they must be made by the tax filing deadline for your business, which for most businesses is April 15th. Your advisor will contact you with all of the necessary information to log into your account and make contributions.

Choosing your investments is the most important decision in the Solo 401K process. You can use the advice of the Vanguard advisors, but a lot of the decision lies on your shoulders.

Think about your risk tolerance, age, and the goals you have for retirement when choosing your investment. Also keep in mind the cost of the funds if paying the fees is important to you.

Small Business Plan

As we said above, the Solo 401K is for entrepreneurs that work alone – with no employees. There is one exception, though. If your spouse works with you, he/she can be a part of the Solo 401K. This means you can have double the maximum amount of contributions as you and your spouse have the same requirements.

Your spouse can make the same $19,500 individual contributions that you make. As his/her employer, you can also contribute up to 25% of your spouse’s income to his/her account.

The Solo 401K is the best way to keep yourself on track for retirement as a solo business owner. As an entrepreneur, you create your own future but still have the tax benefits that those working for someone else would enjoy.

Vanguard makes it easy to set up your own retirement account, ensuring that the future of you and your spouse (if applicable) is well cared for with a tax-advantaged account.

Vanguard vs Fidelity 401k

We have many clients who are comparing a Vanguard plan to a solo 401k plan offered by Fidelity. The truth is – we are fans of both plans.

We have contacts at both companies and are familiar with both plans. The reality is that the business owner needs to decide which company they would rather work with. It usually comes down to which one you currently have accounts with.

It might make more sense to you to open up an account with a company that you are already doing business with. That way you can use their app to consolidate your financial holdings.

5 Top Contribution Strategies

  • Don’t forget the Retirement Savers Credit. The credit is still available but it starts to phase out at $65,000. It can be 50%, 20% or 10% of your retirement contribution depending on adjusted gross income on your tax return.
  • Maximize your profit sharing. Don’t forget you can contribute a maximum of $57,000 through profit sharing and employee deferral.
  • Consider adding a cash balance plan. A cash balance plan can complement your 401k plan. You could possibly add $100,000 in retirement contributions.
  • Catch up 401k contributions. Don’t forget that folks 50+ years old may add an extra $6,500. This increases the max to $63,500.
  • A Mega Backdoor Roth might work. If a Roth works for you, consider the Mega Backdoor Roth. You may be able to max the 401k max if you can’t do it the profit sharing contribution.
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