One of the great benefits of starting up a side hustle is the ability to get paid as an independent contractor. When you consider all of the sweet benefits you get from side hustling, you have to assume that the government must want us to pick up a side hustle.
Take tax deductions, for example. The government lets you deduct expenses related to your side hustle for things you might already be doing anyway. With a little planning, someone driving for Uber in their spare time could easily offset some or all of the costs of driving that they’re already doing anyway.
Perhaps the most amazing thing that the government lets you do as a side hustler is to save money into extra retirement accounts that other people don’t have access to. If you start a side hustle, you can save a part – or in some cases, almost all of your side income – into special tax-advantaged accounts like a Solo 401k, a SEP-IRA, or a Simple IRA. And depending on how much you make and what type of retirement accounts you already have, you could potentially save thousands more per year in tax-advantaged savings.
I’ve always assumed that these types of accounts were only available to people running “real” businesses. For whatever reason, it never occurred to me that an Uber driver or a DoorDash courier could also contribute to these accounts. But yes, even an Uber driver or DoorDash delivery person (or any gig economy person) can potentially save away thousands of extra dollars per year in a way that a person only working a 9-5 job can’t do.
A few years ago, I finally got around to setting up a Solo 401k for myself. By opening up a Solo 401k, I’ve created a bonus retirement account for myself, giving myself years of tax-free growth, and best of all, reducing my tax liability now. And this is all from doing nothing but lowly on-demand, gig economy work.
If you’re doing Uber, Lyft, Postmates, DoorDash, Rover, or working with any other sharing economy or gig economy app, you need to look into the power of the Solo 401k.
What’s A Solo 401k And How Can You Use It?
Most traditional employees will have access to just two types of retirement accounts – a 401k through their employer and an IRA or Roth IRA. If you’re a little savvier, you might sign up for a high deductible health plan also and contribute to a Health Savings Account.
But, if you’re really savvy, you might pick up a side hustle and create yourself another retirement account with a Solo 401k.
The mechanics of a Solo 401k are fairly straightforward. If you’re earning income as an independent contractor, you’re eligible to create this type of retirement account. In essence, when you’re side hustling as an independent contractor, you’re essentially your own small business. This allows you to create your own retirement plan for your own independent business.
There are two parts to the Solo 401k – the employer part and the employee part. As an independent contractor, you’re both the boss and the employee of your own little business.
For someone like me, a Solo 401k is perfect because it lets me save the most money. My day job doesn’t have a 401k – instead, I have a 457 plan at work. The IRS calculates the contribution limits for a 457 separately from contributions to a 401k. This means that I can max out my 457 and still contribute almost all of my side hustle income into a Solo 401k, treating it as my employee contribution. Not only does this give me the benefit of compound growth, but I also get an immediate return by deferring all of the taxes on that income at a point in my life when I’m in a pretty high tax bracket.
A Solo 401k also makes sense for me because of my expected income growth. By keeping my side hustle income in a Solo 401k, I don’t have to worry about any pro-rata rules messing up any future backdoor Roth contributions in the same manner that using SEP-IRA would.
Setting Up My Solo 401k
The process of setting up a Solo 401k seems like it might be complicated, but it’s actually pretty easy. I ended up going with Fidelity for my Solo 401k because they have no administrative fees and you can invest in very low-cost Fidelity index funds. When you’re ready to start your Solo 401k, you can check out the step-by-step guide that I wrote about how to set up your Solo 401k using Fidelity.
Vanguard is also a fine choice for a Solo 401k, but they charge you $20 per year for each mutual fund you invest in. Since I only make a few thousand dollars per year of side hustle income, that fee doesn’t seem worth it to me, especially when I can get essentially the same thing for free elsewhere.
To set up your Solo 401k plan, you’ll need to first grab yourself an Employee Identification Number, or EIN. You can grab one online through the IRS website. I got mine in just a few minutes. After that, I went to Fidelity’s website, where I filled out an adoption agreement and an account opening agreement. I then mailed the forms to Fidelity. My Solo 401k was set up just a few days later.
*Note that you need to set up your Solo 401k by December 31st if you want to contribute for that tax year. Once your Solo 401k is set up, you have until your tax filing deadline to make your contributions. It only took me a few days to get everything set up, so even if you’re running close to the end of the year, you can still get your Solo 401k up and running.
Treat Your Solo 401k Like A Bonus Retirement Account.
The absolute best way to use your Solo 401k is to treat it like a bonus retirement account. If you’re already maxing out your 401k at work, then, unfortunately, you won’t be able to put in quite as much money. That’s because you’ll only be able to make employer contributions to your plan. I’ll go more in-depth some time about how much you can contribute to a Solo 401k in a future post, but basically, for the employer contribution side, it’s about 20% of your profits for the year. (Update: Here’s a post to help you calculate your employer contributions to your Solo 401k).
Still, someone making an extra $5,000 in a year and already maxing out their 401k at work can put away about $1,000 per year into a Solo 401k as an employer contribution. That’s not so bad. If you’re really good and able to make a ton of side hustle income, you can put away even more.
But the real benefit to a Solo 401k is if you’re like me and don’t have a 401k at work. Then you can really crush it by putting away almost all of the side hustle income you earn. If I’m able to keep making around $5,000 or so per year from side hustles, I can easily put away over $4,500 every year just from my side hustles. Let it compound over time and we’re looking at nearly half-a-million dollars in 30 years.
Imagine how awesome that would be if I could say that I had an extra $500,000 in retirement because I spent the last 30 years working a few hours per week as a lowly delivery man.
Additional Thoughts
- I refer to independent contractors a lot in this post, but really, I just mean any type of self-employment activity. You only need two things to be eligible for a Solo 401k – self-employment activity and no full-time employees. Most people doing side hustles like Uber or DoorDash don’t realize that this activity counts as self-employment since you’re working as an independent contractor, rather than an employee.
- For other reading, consider reading my post on how this might be the easiest time in history to start up a side hustle. As a corollary, it might also just be the easiest time in history to save money for retirement.
- Consider also reading my post on how your side hustle is worth a lot more than you think. You’ll be surprised at how much your meager side hustle earnings can add up if you can stay consistent. Also, check out the underrated value of a side hustle for early retirement.
I’m by no means a tax expert, so take anything I say with a grain of salt. Consult your accountant or CPA before acting on anything I say.
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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.
- 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 just $10 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- 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.
- Moomoo (15 free stocks) – Moomoo is a free investing app currently offering 2 different referral bonuses if you open an account using a referral link. Read my Moomoo referral bonus guide for more information.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more 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 ($200) – Upgrade is a free checking account that’s currently offering a $200 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 $200 Referral Bonus – Step By Step Directions.
- Ally Bank ($100) – Of all the banks out there, Ally is, without a doubt, my favorite. At the moment, Ally is offering $100 to customers who open an eligible Ally account and meet the requirements. Here are the step-by-step directions to earn your Ally Bank referral bonus.
- Fairwinds Credit Union ($175) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- US Bank Business ($800) – This is a fairly easy bank bonus to earn, since there are no direct deposit requirements. In addition, you can open the Silver Business Checking account, which comes with no monthly fees. Check out how to earn this big bonus here.
- Fifth Third Bank ($200) – 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.
- GO2Bank ($50) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $50 referral bonus.
- 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.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Varo ($25) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $25 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
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 $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.24% 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.
- Empower. 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.
Can anyone provide some clarification. My goal is put all of my self-employment side hustle income into a solo 401lk. Which I opened with an EIN. Lime Scooter let me enter an EIN when I signed up. However, DoorDash appears to only ask for my Social. If I earn 1099 income from DoorDash can I still contribute my Self-employment income earned under my Social to my solo401k.?
Thanks in advance.
Does fidelity allow you to invest in individual stocks for your solo 401k? I’ve been looking for this and seems like nobody is doing videos on how to buy on a solo 401k so no idea what options there is, I did find some people saying that you can open the solo 401k and on top of that ask fidelity to open a self directed brokerage account inside the solo 401k and be able to buy individual stocks(if i get it right this means both accounts will be linked and you can contribute the 19,000 into the brokerage account as you would on the solo 401k with the same benefits but also being able to buy individual stocks)? , not much info on that tho is hard to find on google
Also a general comment regarding Roth solo401k…yes, it makes sense, EXCEPT if you are doing an income-based loan payment. You want to get your AGI down in order to get your monthly payment lowered, so you would want to do traditional in that case. The amount that I pay in total over 20 years- the tax bomb- if I base on similar income is less than half of the original loan amount. Of course the program could change so I am saving some money in retirement and taxable accounts, but that seems to be the smartest/legal use of my money. BTW I work in healthcare in a severely underpaid field, my karma is good.
Question! I hope you can answer this. What if you have multiple self-employed gigs?
My primary gig is acupuncture, with the knowledge from your blog, I opened up a solo401k for it. Yay!
I also work as a musician (even in the pandemic! yes, lucky), sell tradelines, and do deliveries.
Can I include these in the same solo401k, calculate a total between all of these, and do it that way? Do I need to open up different solo401ks? Or can I only have the one solo401k, which would be for the thing that pays the most (currently acupuncture).
I’m new to retirement accounts and just opened a Roth IRA last year. Already maxed out for both 2019 and 2020.
My current job offers 401 k with match after two years, I’m only 8 months in so far but always looking for a better job package but probably won’t happen for a while due to the pandemic.
I have been making ebay and mercari sales for the past few years but only making about $100-$300 per year. 2020 is the first year where I hit the $1000 mark and wondering if it is worth trying to set up a solo 401k for this. I do not buy and resale. I only sell things to clear out my house for some money if it doesn’t sell, it usually goes to goodwill. So I’m not sure if I will reach $1000 in future years. Or perhaps taxable accounts would do better in this case?
Hey Lily,
You should opt to just save that money in taxable accounts or increase your contribution at work. This money you’re making isn’t taxable since you’re just selling old stuff in your house at a loss (assuming you paid more for the stuff you’re selling than what you sold it for).
Have you considered switching to a Roth Solo 401k with the new 20% QBI deduction in the tax law? Traditional Solo will nullify this but you’d still get it with a Roth.
Yeah, I definitely have since the 20% pass-through deduction went into effect. FI Tax Guy had a good post explaining why the Roth Solo 401k is generally better. You can read it here.
I have to figure out the logistics behind it is what’s tripping me up right now. Fidelity doesn’t have a Roth Solo 401k option. Meanwhile, Vanguard does, but the issue is I don’t think they accept rollovers, which is one of the benefits of having a Solo 401k. I tried to set up a Roth Solo 401k with Vanguard in 2019, but the Vanguard guy told me that if I already had a Solo 401k with Fidelity, I’d need to close that one first before I could do one with Vanguard because I can’t have two active retirement plans.
Long story short, yes, I do want to do a Roth Solo 401k in light of the 20% passthrough. My issue is I’m having trouble figuring out how to do it logistically.
because Fidelity doesn’t have a Roth Soll 401k
Oh interesting about not being able to have two active at the same time. Thanks for the reply. Based on the The College Investors’s article, E*TRade might be the best bet for Roth Solo. It’s free and allows rollovers. He also mentions you can do in-service rollovers which seems like a great opportunity to convert each year to a Roth IRA for contribution access. Good Luck!
Thanks for the great article.
Do you know how you can rollover a solo 401k into an IRA?
Basically I’m just looking into ways I can access these funds before 59.5. I would like to be able to convert these funds to a Roth IRA in early retirement, so then I can withdraw the contributions in 5 years.
I believe you can just rollover any Solo 401k into an IRA, same as you would for your 401k at work. Solo 401k is literally a 401k, just that you’re the employer that created the plan.
With all your side hustles how and when do you add money to your 401k throughout the year?
For a SEP you can just wait till you get the 1099, then add up gross income minus expenses and that 20% of the net before tax filling.
I just do my contribution to my Solo 401k once per year, after I’ve done my taxes. Contribution deadline is by your tax filing deadline, so you know what you can contribute when you do your taxes. It’s actually the same process as what you would do with a SEP.
I don’t get a 401k from my current employer. We make sure my wife max hers. Being a being hygienist is weird. 90% of office only hire you part time so they do have to give you benefits (horrible career if you don’t have a spouse with great benefits). Office then use a temp agency (specially for dental) for days their hygienist is out. When you temp at these office they will either pay you W2 regular payroll or 1099. In the eyes of dental association and I guess irs it’s illegal cause hygienist work under the doctor, but they still do it anyways. Last year I didn’t get any 1099. This year I moved and temping more so I think I’ll make $4-5k. I get screwed cause I have to cover he employers portion of employee tax. I’m thinking about opening SEP IRA. It’s simple, to set up, I have until tax day the following year unlike solo 401k it’s calendar year, but I can’t put as much as solo 401k upfront. I’m not sure if the extra steps on contributing to solo 401k throughout the year as employee then as employer matching for making several thousand. One down side is the Backdoor Roth pro rata rule with SEP IRA. We plan on leaving our jobs in the next 3-5 years. I could be wrong. It’s nice having other options from others with side hustle and the FI mentality.
So in your situation, I would definitely recommend doing a Solo 401k instead of a SEP-IRA. Like you pointed out, it’ll make it much easier for you if your income gets over the Roth limits and you need to do backdoor Roths. And with the Solo 401k, you’ll be able to save more by making employee contributions to your Solo 401k.
The process is really not that hard. You just fill out some forms and mail them in. I set mine up with Fidelity and it was easy enough to do. And the Fidelity Solo 401k has no fees other than the expense ratios of the funds you invest in, so there’s basically no downside to opening up a Solo 401k with them. Just make sure to get it done before December 31st.
Here’s a post I wrote about how I set up my Solo 401k with fidelity.
I’m a dental hygienist. I sometimes fill-in at offices and sometime pay me 1099. Last year I didn’t get any 1099, this year I’ll prob get $4k-$5,500.
For the convenience, will at SEP be better? Next year I might not get any 1099 or get several thousands. With a solo 401k would I need to open a checking account for the 401k? Also its SEP?
Do you have a 401k at another job that you max out already? If not, I’d recommend the Solo 401k because it’ll allow you to put more away. SEP-IRA is limited to about 20% of your 1099 profit. But a Solo 401k allows you to also make an employee contribution (remember, you’re an employee and an employer when you’re a 1099 contractor).
I’m a city worker. I contribute to both a 403b, 457, and an IRA and will max it out next year (18.5k + 18.5k + 5.5k = $42,500). Can I also set up a solo 401k?
If you earn any 1099 income (i.e. non-W2 income that you pay self-employment taxes on), then yes, you can set up a Solo 401k. Note that if you’re maxing out your 403b, you’ll only be able to make an employer contribution to your Solo 401k, which is limited to about 20% of your total side hustle profits. Make sure to look at a calculator though to do the math correctly – most tax software will do it for you or you can read this post I wrote: Solo 401k Contribution
Sweet, thanks for the post. I am currently setting up a solo 401K account with vanguard. My question is this.
My wife and I both participate in the business. It will generate 10K this year between the two of us. Is there a need to set up a solo 401K for her also? Or I just set up one account and put in the roughly 2K in pretax (20% of 10K). Or if I set one up for her also can we essentially double dip and put in 2K each for a total of 40%? I doubt this is the case so there probably isn’t any reason why she would need her own solo 401K since we both have 401K from our workplace. Thanks
Have you heard about getting”check writing privileges” for your solo 401k? Apparently a way to invest those funds into real estate or other alternative investments.
I have not heard about check writing privileges and don’t know what that means. To be honest, I’m really boring with my investments, so don’t really feel the need to dip into the alternative investments. Maybe one day I’ll have so much money that I don’t know what to do with it, but for now, I just do boring stuff.
Do you have to file any forms to the IRS as the “employer”?
Nope. All you do is set up your Solo 401k, then just make sure that you don’t contribute more than you’re allowed to.
The savings accounts rly worked out for me so i know this would be of great benefit if is coming from you, i want to know who is elegible for this? Aside from uber, post etc, i work in a beauty supply and at first the owner asked me on the interview if i wanted cash or by the law to let him know, i was so focus on getting the job that i didn’t mind but now i’m always getting my pay in cash i never signed any contract to work there and yet ‘ been there 4 months, i do pay taxes every year, am i elegible?
So, you’re eligible for a Solo 401k if you’re earning any form of 1099 income that goes on a Schedule C. If you’re doing Uber and Postmates, then you’re technically self-employed, and thus, you can use a Solo 401k. Just make sure you calculate how much you can put into it. You’ll need to talk to a tax person or do a bit of research to make sure you’re calculating it right.
As for the beauty supply thing, I don’t really know what’s going on there.
That’s a good point about being able to put a lot more in your solo 401k if you only have a 457b at your work (I’m in the same situation currently). I have an old solo 401K that I set up doing locums for 6 months a while back and it saved me this year because I was able to use it to roll a sizeable IRA into the solo 401K, so I could do the back door Roth IRA conversion. I don’t understand all the tax laws but I do know that if you have existing non-Roth IRAs, you get taxed on them if you do a Roth conversion, so this is another benefit of a solo 401K (it lets you roll over non-Roth IRAs). However, comparing Fidelity and Vanguard (I looked at both), only Fidelity had the option to roll other accounts into their solo 401K so I went with them, and Vanguard did not (otherwise I would have done Vanguard for sure).
Once it’s opened up, you always have it, so the type of earned income can change. Although I used to use it for locums, I can now use it for anything and I have it for life. That’s why anyone with a side hustle should open one now – and given the ability to roll other types of accounts into them (at Fidelity anyway), they’re remarkably flexible, so I’m a huge fan. Now I just have to figure out how to make extra $ on my own on a 1099 basis so I can contribute to my solo 401K again! Maybe I’ll try that survey idea above. Thanks for this post – very helpful!
Super high value post. I’ve been investing in a solo 401k for the past 4 years and love it!
That’s awesome! You’re self employed right? How much are you able to put away in it every year? I’m guessing a ton!
Thank you for the insightful post! I just started my first side hustle about 6 months ago, and I haven’t given much thought to starting up a solo 401k. It’ll be something I’ll consider next year!
Glad it was helpful! I’ll have a future post about the differences between a Solo 401(k) and SEP IRA. I still think Solo 401(k) is the way to go for majority of people just because of the potential of being able to save way, way more in it.
Is the employer contribution limit 20% or 18%? And if I have a EIN number, so I have to report that number rather than my social security number to count it as independent contractor income. And does independent contractor income mean I have to pay the employer contributions for FICA and Medicare (~7%)?
The employer contribution limit is basically 20% of your earned income minus deductions for self employment taxes.
I’ll definitely touch on this more in a future post because it’s definitely confusing in figuring out the limits (I’ve had a ton of trouble figuring this out), but here’s basically how you do it.
So lets say you make $5,000 after taking your normal deductions. You can’t just contribute the full $5,000 though because you still have to pay self-employment taxes on that $5,000, which basically comes out to 15.3% (7.65% as the employee and 7.65% as the employer). BUT, half of that 15.3% is a deductible expense, just like any other expense you might deduct on your earnings. And the government doesn’t make you pay SE taxes on that amount.
In order to calculate this, you take the $5000 you earned and multiply it by 92.35% That’s because 7.65% (remember, half of the 15.3% SE taxes) is deductible. So now your total taxable earnings for the year, after deducting half of the SE taxes, are $4,617.50.
From there, we take that $4,617.50 and multiply it by 15.3%, which represents the actual SE taxes owed. We don’t have to pay SE taxes on the portion that’s deductible. That leaves us with total SE taxes of $706.47.
From there, we take the $706.47 and multiply it by 50%, which represents your portion of the SE taxes. Now we’re left with $353.23. That’s the total SE taxes owed by the employer (which is you in this case).
Then we go back to the original $5,000 and subtract the $353.23 of SE taxes that are supposed to be paid by the employer. That leaves us with $4,646.77.
If you have enough 401(k) space already, then you can just throw all that in as your employee contribution. You’re done.
But, if you’re just trying to calculate the most you can contribute as an employer, then you take 20% of that $4,646.77 (which represents the amount earned minus deductions for half of the SE taxes). That gives you a total of $929 eligible as an employer contribution.
With regards to your second question, the EIN isn’t required to count as independent contractor income. It’s independent contractor income if you’re paid via a 1099 or basically in any manner in which you’re not an employee. And yep, you have to pay the employer portion of FICA, which is all calculated into it if you follow the steps above.
I’ll definitely try to flesh this out in a future post. It’s definitely complicated. If you’re not sure, definitely look at any Solo 401(k) calculators out there to confirm.
Since it seems so difficult to figure out what exactly is 20% until you get a 1099, would you suggest making a lump sum contribution into the solo 401k once a year before the April deadline?
Yes, I’d highly recommend doing a contribution only once per year after you’ve done your taxes, figured out your deductions, and made accurate calculations. It’s way too hard to figure it out as you go.
What made you go with the Solo 401k over the SEP-IRA? I had heard the Solo 401k are much more difficult to set up than a SEP. I’m curious to hear your thought process on picking between the two accounts. Thanks for sharing!
I touched on this in the article and its definitely something I’ll probably go in depth more in a future post. Basically, the primary reason is that a Solo 401(k) let me put the most money away. Since I don’t have a 401(k) at my current job – I have a 457 plan at work – going with a Solo 401(k) essentially lets me put away almost all of the income that I earn in my side hustles.
The second reason is to leave the option open for me to go with a backdoor Roth in the future. Having money in SEP IRAs triggers the pro rata rule, which basically makes backdoor Roth’s impossible or much harder to use. I actually still have about 650 dollars in a SEP IRA from 2015, (before I learned about the Solo 401(k)) that I’m planning to roll over into my Solo 401(k) as soon as I can.
Hmmm, I’m confused about this pro rata rule. I opened up a SEP IRA for 2019 contribution in May 2020 since I missed the deadline for solo401k (btw, this is taking WAY longer to open than the SEP IRA- 2 weeks already waiting, now a phone call from them, questions they asked me that no one knows what I should put, still pending. The SEP IRA was opened in 3 days).
In the meantime I’ve discovered M1 finance. I really like it because of the pie format, I can just put percentages I want and it will adjust the amount I contribute automatically. They don’t do solo401k but I can get a SEP IRA there. Is it possible to contribute to both a SEP IRA and Solo401k for the same year? I guess I’d do the employer contribution on the SEP IRA and then the normal $19.5k (if I get there! hopefully) on the solo401k?
Following up here. I have been told you can’t have both a solo401k and SEP IRA for the same year.
Great article! I’m in a similar boat to Physician on FIRE above as my wife and I both have our 401k’s maxed out, but for our side hustles, maybe there’s something to that 20% employer contribution. I wonder if some careful analysis on the tax strategy might be in order, though. You touch on it for your reply to Josh, but let’s say that instead of taking deductions to reduce your net profit to zero, you take no deductions and can invest (sheltered) $1k of the $5k profit? This early in the morning I’m not thinking about it too clearly, but there is likely a tipping point where you might be better not deducting certain expenses to get at the 20% of profit to shelter in the solo 401k.
That’s a great point and not something I had thought about. I haven’t done any math at all. but I’d think that deducting would always be in your advantage. The reason why is because when you deduct, you pay no taxes on any expenses you deduct, since obviously, there’s no profit to tax. The deduction is ultimately just the way to tell the govt that you’re not actually getting all of the money you received because you had to pay expenses. So if you don’t take a deduction when you have the right to it, you’re basically paying extra on profit that doesn’t exist. Remember, when you’re self employed, you’ve still got those self-employment taxes (i.e. social security and medicare) that you have to pay no matter what.
I really need to look into sep IRA for my business but for next year since I started in October lol
Not a bad idea to go with a SEP just to get some of that money put aside. One thing to note, since you’re self-employed I believe, you’d most definitely be able to put the most money away per year with a Solo 401(k).
Awesome post! I’ve been curious about these for a while. Sounds even easier than I thought to set one up.
Great job maximizing your contributions, FP!
Was very surprised to see how easy it was to set up. It’s definitely not as easy as opening up an account with a Robo-Advisor, but it’s much less scary than I thought it would be.
Reading all this post are very helpful, as I have been thinking to open me a solo 401k soon. I am self employed for the last 14yrs. Filed Taxes as 1099. Never have EIN till this year 2020
Now, my question: Can I make my first contribution for year 2019? Is just I am 49 and feel like I have a lot of catching up to do
Mimi💃
Thanks for this post! I am an Uber driver on the side, and I am really interested in this account. I had previously been under the impression that I could only contribute the 20% employer limits.
Is this 20% of gross receipts or net of expenses? I actually take a “loss” each year doing Uber because of so many miles driven. But it is nice cash flow right now because my car is already paid off.
So you have to first calculate it based on your net operating profits. So basically, what you earned minus all deductions you take. So if you make $5,000 a year but are also deducting $5,000 per year, then you’re making zero for the year and can’t put anything away. That sort of makes sense when you think about it, because when you’re deducting expenses, you’re not paying any taxes on those earnings anyway.
This is AWESOME! I’ve heard of these accounts, but definitely need to brush up more. I totally see this in my future. Excited for 2017! Thanks for sharing!
Set it up for next year for sure! No one talks about these, but it’s pretty crazy how much you could potentially put away depending on what your current retirement accounts are.
I just may do this. I was hoping I would have until mid-April to make a decision on funding it for 2016. It appears I had better act fast!
I already fully fund a 401(k), so I cannot make employee contributions, but my understanding is that I can contribute 20% of profits as an employer contribution.
Thanks for the most timely write-up!
Merry Christmas to you & yours,
-PoF
Merry Christmas PoF!
If you’re already funding your 401(k) and you’re not doing backdoor Roths, then you can probably just open up a SEP IRA. With a Solo 401k, you need to open it up by December 31st, but you can fund it up until April.
With a SEP, you can put away 20% of your side hustle earnings (like with your blog) and you have until April of next year to open that one up. So you’ve still got time to think it over.
Anyone here know if this is legitimate use of Solo401k funds? You invest $15k of your solo 401k into a startup business in exchange for 5% of the business. You then take a job in sales with that company. You still have your solo401k self employed business as well. Does taking a job with that company disqualify it in any way? Thanks
That’s more complicated than what I know unfortunately. Would need to talk to a tax person who knows that stuff.
I’m looking at this for next year. There is little advantage to me personally as I’m going heavy into a 401k at work, however as my wife dips into the contractor/side hustle pool while being a stay at home mom this will be relevant. Thanks for the timely post. Happy holiday.
Right, if you’re already going all out on the 401k at work, then you’re going to be limited in one you can put away. For your wife though, she could potentially put away a ton with a Solo 401k. Way more anyway then she could with a SEP if my calculations are correct. I was personally shocked to find out that I could basically put away almost everything I earned, since I don’t have a 401k at work. It’s a big bonus for me.
Happy Holidays to you as well!
I was under the impression that you could still open a Solo 401k through pass-through income in a side hustle as well. Meaning that you could have an LLC that is taxed as a sole-proprietorship with pass-through income, you could still open a solo 401k.
I don’t have any side-income hustle, but would want to set things up as soon as I do have ancillary income.
I’m definitely no tax expert, so I have no idea to be honest, but I’ll try to do some research and give a more intelligent response. What type of side hustle are you thinking of doing?
Really was thinking just more in terms of the side hustler’s out there doing a sole proprietorship thing, like what I do in my spare time with Postmates. If you talk to 99% of Uber or Lyft drivers, they probably have no idea that they can save money in this way. I know I had no idea when I started trying out these gigs economy apps.
Sometimes research companies collect market data from physicians through surveys. This is a relatively easy way to earn some side money (although this data collected often generates big revenues for the company) without significant effort. The downside is that the availability of these opportunities can be limited. You might not get invited to a survey for months, and sometimes you don’t qualify for some reason or another.
I’d imagine that if you are the only employee in your company, you might not never need an EIN.
That’s a pretty easy way to make some side income. I know a couple of physician assistants who do soap notes on the side. (is that what it’s called?). They don’t make a ton doing it, but it brings in some decent income. Only problem is that they already max out their 403(b)s at work, so they’re fairly limited in what they can put away.
The only reason to get the EIN is because you need one to set up a Solo 401k. It literally took me 5 minutes, and its all done online. Not a bad thing to just have in case you need it I feel like.
You’re absolutely correct. I tried to get an EIN today, but apparently you can only request one during weekday business hours! I wonder if Fidelity can get one set up by the end of the year.
How long did it take for you to get your Fidelity account active after you sent in the application?
I’d say it took me about 2 business days once I sent the forms in. I admit it’s definitely cutting it close. I only just got mine set up last week. If you’re not sure, I’d definitely give Fidelity a call and see if they think its doable in that time frame. I imagine there are a ton of people still out there trying to get there accounts opened before the end of the year.
Hello! Solo 401k is new to me and I’ve only recently been researching it. I’ve been reading through this article and all comments… I want to understand the advantages of opening a Solo 401k before the end of the year?… Can I open my Solo 401k after January 1? It’s nearing the end of 2019 as I type this (Today is 12/19/19) and I want to know if I should be rushing to do so as well?
I’d appreciate any help! Thank you!
Sorry for the delay. You should rush to open a Roth Solo 401k right now. I think you can get it done if you hustle. You need to open it before December 31st to be able to contribute 2019 income to it.
Do you know if this is still true considering all the pandemic stuff? Was just curious. I didn’t get around to opening my solo401k until now (but at least I did do it!). I decided to go with Schwab since my other IRA accounts are there. It would be awesome since now I have some extra savings and it could dramatically lower both taxes and AGI for PAYE calculation.
So actually I just spoke with a rep at Schwab. There is something called the SECURE act that is extending the dates on when you can open for 2019, just has to be before the tax date. It’s different than in previous years. She is verifying this with me but it’s huge bc if I can get $8k in my 2019 solo401k it will make my taxes go down by 1200 apparently. And also get that $$ out of my grubby lil hands, and also keep my PAYE close to $0 (my calculation would have gone up upon recalculation this year). This is HUGE for me.
Interesting. I haven’t been keeping up with all the new legislation, so I’ll have to do some research. One thing is that I wrote this post back in 2017, but with the current 20% passthrough deduction under the new tax laws, you might want to consider doing a Roth Solo 401k instead. Unfortunately, Fidelity does not have a Roth Solo 401k, so you’ll have to look for a different brokerage for that.
You shouldn’t have any problem opening up a Solo 401(k) with a single-member LLC. It’s not that the LLC is taxed as a sole-proprietorship, but that an LLC doesn’t exist for tax purposes (unless you make an election for it to be taxed as a corporation). In a single-member LLC the income is going to “pass through” directly to the member, whereas in a multiple-member LLC the income would “pass through” to the partners as if they were in a partnership (the LLC would generate K-1s for each partner).