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Our Solo 401(k) with Vanguard

One of the most common topics readers ask about is what my wife and I do with our own portfolio. Admittedly, I derive some amusement from that fact, given that our own portfolio is as unexciting as a portfolio can be. As we’ve discussed here on a few occasions, we use a grand total of one mutual fund for the entirety of our retirement savings.

Our retirement account decisions aren’t especially exciting either: We max out our Roth IRAs every year, then we contribute as much as we can afford to contribute to a solo 401(k) with Vanguard.

Still, a handful of readers have asked about the decision process for why we use a solo 401(k) and why we went with Vanguard, so here goes.

Why Solo 401(k)?

We chose to use a solo 401(k) — alternatively referred to as an “individual 401(k)” or “self-employed 401(k)” — rather than a SEP IRA or SIMPLE IRA because a solo 401(k):

  • Allows for larger contributions each year, and
  • Can accept Roth contributions. (Of note: It is only the employee contributions to a solo 401(k) that can be designated as Roth contributions. The employer contributions must be tax-deferred.)

It is slightly more work to open a solo 401(k) — rather than opening the account online in just a few minutes, you actually have to fill out some on-paper forms and mail them in to Vanguard. But it’s not especially difficult.

Why Vanguard?

We opted to use Vanguard for two reasons:

  1. As mentioned above, we like their all-in-one funds, and
  2. We already had our other accounts with them, so it’s simpler to keep everything in one place.

That said, Vanguard’s solo 401(k) isn’t going to be a good fit for every self-employed person. For example, Vanguard’s plan does not allow for incoming rollovers. For us, this is a nonissue, but for other people it could be an important point. (Rolling money from a traditional IRA to a 401(k) can sometimes be helpful as a part of a backdoor Roth IRA strategy.)

Fortunately, there are several firms that offer no-fee solo 401(k) plans that do allow for incoming rollovers. For example, as of this writing:

  • Fidelity’s solo 401(k) and Schwab’s solo 401(k) both allow for incoming rollovers, but, unfortunately, they do not allow for Roth 401(k) contributions.
  • E*Trade’s solo 401(k) plan allows for incoming rollovers and Roth contributions. And if you have an incoming rollover of $25,000 or more, you may qualify for a new account bonus. On the other hand, you would probably end up spending some money each year on trade commissions (e.g., to buy low-cost ETFs from Vanguard or another fund family). 
  • TD Ameritrade’s solo 401(k) plan allows for Roth contributions and incoming rollovers, and you can buy many ETFs (including many popular ones from Vanguard) without paying commissions.

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