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create your own 401k

Don’t Like Your 401k? Create Your Own 401k Instead

Last Updated on 12 Comments
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A few weeks ago, I finally went ahead and made my 2017 tax-year contribution to my Solo 401k. Being the lazy guy that I am, I ended up making my contribution at the very last minute, literally overnighting a cashiers check to my Solo 401k company so that I could meet the contribution deadline (I applied for a tax extension back in April, so my 2017 Solo 401k contribution deadline was October 15, 2018). 

This latest contribution marks the second year that I’ve contributed to my Solo 401k – I made my first contribution last year after I learned what a Solo 401k was and how it worked. The year before that, I contributed to a SEP-IRA, but only because I missed the deadline to create my Solo 401k. (Pro-Tip: You need to open up your Solo 401k in the calendar year that you plan to make your first contribution. I messed up two years ago because I didn’t open up my Solo 401k until April of the next year.) 

As a quick recap, a Solo 401k is a self-employed retirement plan. It’s essentially a retirement plan that you create for yourself if you’re self-employed and have no employees. If you earn any income as an independent contractor, you are eligible to contribute to a Solo 401k.

What makes the Solo 401k advantageous is that it gives you access to an extra tax-advantaged retirement account. While most people will just have a 401k from their employer, plus an IRA that they might make on their own, those of us who are side hustling can save a little bit more by using a Solo 401k. It’s the side hustler’s bonus retirement account!

Beyond just opening up your ability to save more into tax-advantaged accounts, opening up a Solo 401k has another interesting aspect that I think gets overlooked. There are a lot of people out there with day jobs that give them bad 401k plans or that work in jobs that don’t offer a 401k. By side hustling and using a Solo 401k, it’s possible to have it act as a sort of a replacement retirement account for your bad or non-existent 401k. It’s a strategy that I’ve been doing for the past year to some extent.

The Problem of Bad 401k Plans

Regular readers of this blog know that I switched jobs around the middle of last year. I started off my career as an associate attorney in biglaw, then worked as a government attorney, and now work at a non-profit in a non-traditional legal role. My biglaw and government jobs both had great, easy to use retirement plans, with access to low-cost index funds from companies like Fidelity and Vanguard. 

My current job is a little bit different. Instead of a 401k, I have a 403b, which is basically the non-profit version of a 401k. It’s used primarily by non-profits and teachers. Oddly, 403b plans have fewer protections compared to traditional 401k plans, which means that these plans are often worse and can be riddled with high fees and sleazy salespeople types. The New York Times wrote a great article about the problem with 403b plans a few years ago, something that I think anyone with an interest in this stuff should read. It’s things like the below, a quote from the New York Times article, that angers me a lot:

The teachers were each charged a fee of at least 2 percent of their savings to manage the money, in addition to sales charges of up to 6 percent each time they made a deposit, the analysis found. Moreover, the calculations didn’t include the expenses of the dozens of mutual funds they were invested in, some of which exceeded 1 percent.

The 403b plan I have at work is unlike any other employer-sponsored retirement plan I’ve ever had. Signing up for it was weird since I couldn’t just open it up online. Instead, I had to talk to some financial advisor “guy” from a local financial company. There’s no online interface for me to choose my investments or change my contribution amounts. I can’t even see a list of all of my investment options. Instead, if I want to invest or do anything, I have to go through this “guy” to do it.

This actually isn’t uncommon in the 403b world. One of my friends is a teacher, and from what she’s told me, her 403b plan works in a similar manner. There’s no easy way for her to see or change her investment options, and anytime she wants to mess with anything, she has to go through her school’s financial “guy.” 

In itself, having to go through some “guy” isn’t necessarily a problem, except for the fact that these financial “guys” don’t really work for you – they work for themselves, as far as I can tell. In fact, the agreement I signed when I opened my 403b makes it quite clear that the financial “guy” did not serve as a fiduciary. Naturally, I had my guard up when I read this, and sure enough, when I set up my 403b, this financial guy sent me a list of actively managed index funds with expense ratios all over 1% and 5.75% frontloads. I wasn’t happy about this. It makes me wonder whether the “guy” my teacher friend has to go through did the same thing to her.

Eventually, I told this guy to tell me what was the cheapest, passively managed index fund I could invest in. He sent me a prospectus for the Blackrock iShares Total U.S. Stock Market Index Fund (ticker symbol BASMX). 

It’s a perfectly acceptable fund, but with an expense ratio of 0.33%, it’s still 15 to 20 times more expensive than any similar fund that I could invest in with Vanguard or Fidelity. Plus, there’s a principle thing in play here about the fact that this guy tried to have me invest in such crappy funds in the first place. It rubs me the wrong way and makes me not really trust him. I wonder how many people at my office are in those funds he sent me initially.

Creating My Own Solo 401k Instead

One thing I’ve been doing this year is to put a little bit less into my 403b, and instead make more of my retirement plan contributions in my Solo 401k. Here’s how it works. 

A Solo 401k consists of two parts – an employer portion and an employee portion. When you’re earning income as an independent contractor, you’re allowed to make contributions to your Solo 401k as either an employee or as an employer. The employee contribution is fairly straightforward. Simply take what you made in self-employment income, subtract expenses, and whatever is left is what you can work with to make your employee contribution. You can use this online calculator to figure out this number or read my post here if you want to learn how to make this calculation on your own. 

It’s important to remember that the total employee contribution you can make to your Solo 401k is limited to $18,500 between all of your 401k accounts (as of 2018). For example, if you’ve already contributed $10,000 to your day-job 401k, you’ll be limited to $8,500 as an employee contribution to your Solo 401k. 

What this means though is that, instead of putting more of our paycheck into what could be a crappy workplace 401k or 403b, we can instead take more of our side hustle income and put that into our own Solo 401k, essentially replacing our workplace contributions with contributions into our own retirement plan.

Take the example of someone that makes $10,000 from side hustling each year (that’s not that hard to do – it only requires $833 per month of side hustle income). A calculator shows that in this example, our side hustler could contribute up to $9,293.52 as an employer contribution. If you’re maxing things out, rather than put all $18,500 into your employer-sponsored retirement plan, you could instead put $9,206.48 into your work plan, and put as much as you can into your Solo 401k. You’ve now maxed out your employee 401k contributions, but you’ve now put a lot of your contributions into a 401k that you control and that (ideally) has the fund options that you want. 

That’s exactly what I ended up doing over this past year. I use Fidelity for my Solo 401k because it has no annual fees, gives me access to really low-cost Fidelity index funds, and most importantly, allows rollover contributions from other pre-tax retirement accounts. All of my Solo 401k contributions go into Fidelity’s Total Market Index Fund (ticker symbol FSTMX). With an expense ratio of 0.015%, it’s practically free. And way cheaper than the cheapest option offered in my 403b plan. 

Again, my 403b actually isn’t terrible. But if I have the choice of buying the exact same thing for less without doing a ton of work, why wouldn’t I do that?

Takeaways

If you have a good retirement plan at work, then for sure, take advantage of it. The ideal thing you can do in that situation is to max out your workplace 401k, then put as much as you are allowed to put into your Solo 401k as an employer contribution. 

But if you’re in a position where you have a weak 401k or 403b, just start side hustling and create your own 401k instead. Then replace some of your workplace contributions with your own Solo 401k contributions. There’s something to be said about having your own retirement plan that you control. 

I’ve written posts in the past about how the Solo 401k works and how I set mine up, so be sure to check those out below. 

Please note, I’m not a tax or financial professional, so this is purely based on my own experience using a Solo 401k. Make sure to consult with a financial professional if you have questions. 

So what do you think? What are you doing if you have a crappy 401k or 403b plan?

More Recommended Ebike/Scooters

Check out these other ebikes and scooters I've reviewed:

  • Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
  • Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
  • Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
  • Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
  • Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
  • KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
  • Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
  • Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
  • Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
  • Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
  • Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
  • Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
  • Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
  • Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.

More Recommended Investing App Bonuses

For additional investing app bonuses, be sure to check out the ones below:

  • M1 Finance ($100) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
  • Webull (20 free stock shares) – Webull's current promotion gives you 20 free shares valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free shares using Webull.
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  • SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with $100 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.

Recommended Bank Account Bonuses

If you’re looking for easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.

  • Upgrade ($150) – Upgrade is a free checking account that’s currently offering a $150 referral bonus if you open an account and complete a direct deposit. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Here’s a post I wrote with more details: Upgrade $150 Referral Bonus – Step By Step Directions.
  • SoFi Money ($275) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $250 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
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  • Fifth Third Bank ($350) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
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  • Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link. Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
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  • Digital Federal Credit Union ($20) – Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $20 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a saving account that gives you 6.17% interest on your first $1,000. Check out my in-depth post on how to set this account up.
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financial panther

Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.

Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.

Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:

  • SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $250 if you complete a direct deposit.
  • 5% Savings Accounts. I'm currently getting 5.25% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
  • US Bank Business. US Bank is currently offering new business customers a $800 signup bonus after opening a new account and meeting certain requirements.
  • M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
  • Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.

Feel free to send Kevin a message here.

Reader Interactions

Comments

  1. Save me says

    Employers through the years pick terrible providers for their 401k plan. Is it possible to have a solo 401k and avoid the employer plan? Does it require a “side” hustle? Or does the IRS only care you are not exceeding the contribution limits? Taking this one step further… give bare minimum to employer plan for the match… then add to your solo 401(k).

    Reply

    • Financial Panther says

      Unfortunately, you’re going to be limited to your Solo 401k based on what you make with eligible income. You can still put a lot in as an “employee” contribution to your Solo 401k, but it’s still going to require you to have 1099 income or other eligible income.

      Reply

  2. Brad S says

    Love your site and found this article very helpful.
    Question: I am a physician and am doing telemedicine as a side hustle, which is 1099 pay for me. When I signed up with the telemed company, I completed a W-9 by listing my SSN as my TIN. I read in your post that in order to create a solo 401k at, say, Fidelity, you need to get an EIN for yourself at IRS.gov. Once you get the EIN, do you need to file a revised W-9 with the company that is paying you 1099 income that uses the new EIN rather than your personal SSN as your TIN?

    Reply

    • Financial Panther says

      My understanding is, no. The EIN really is just for creating the Solo 401k, but as a 1099 contractor, your 1099 income is going to be attributed to you as pass-through income no matter what, so it’s not like it changes anything. You’re still just deducting on your personal income tax return.

      Reply

  3. Ian says

    Hi Kevin,
    Just found your blog and am loving all the side hustle info! Quick question for you regarding the Solo 401k. Do you have individual Solo 401ks for all your unique side hustles (Door Dash, Wag, etc.) or do you have a single Solo401k for them all combined? I have a few side hustles and am wondering if I would need to set up individual 401ks for each one or if I could use a single account for them all. Thanks!

    Reply

  4. Millionaire Dojo says

    Tax optimization is something I need to learn a lot more about! I’m excited to setup my own retirement account with my eBay income. I know people like the millionaire educator used their government retirement accounts to basically avoid paying any taxes. I need to figure out how I can optimize my taxes as good as possible. Thanks for the tips!

    Reply

    • Financial Panther says

      Glad you found this helpful. Government retirement accounts are real sweet – the 457 is like the ultimate FIRE account. I had that when I worked in government. Maybe I should write about that sometime.

      Reply

  5. Anne says

    LOVE this post, thank you! I too am a side hustlin’ lawyer and I’ve had a SEP IRA for a few years. It’s really helped keep my tax bill down. BUT I didn’t know I could open a solo 401k too?! Do you have a SEP IRA, solo 401k, AND employee sponsored 401k?! I’m thinking of opening a solo 401k, if IRS rules allow me to (I also have a traditional IRA). What do you think?

    Reply

    • Financial Panther says

      So, I’m not a tax expert, so be sure to do your own due diligence, but yes, you could have both open at the same time, BUT, it won’t do anything to help you because your employer contributions are still going to be limited. In other words, having both open won’t let you contribute more. The Solo 401k is the one that will allow you to save more.

      I haven’t written a post about this, but in most situations, it would make more sense for you to have a Solo 401k, then rollover your SEP-IRA contributions into the Solo 401k. That way, you can leave the backdoor Roth option open, assuming you’re a high-income earner. That’s what I did.

      Reply

    • Anonymous says

      You can, but the contributions limits aren’t doubled. You still have to fall within the max for employer contributions.

      Reply

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