How to open your Solo 401k on E*Trade. Secret: It’s easy!

Self-employed physicians have the onus and flexibility to structure their own retirement plan options.  How you structure your own retirement plan depends whether you have employees, but if you are a contractor receiving income from a 1099-NEC your options for pretax retirement savings are relatively straightforward.

The two main options for single person pretax retirement include a SEP-IRA and an Individual 401k.  The take-home comparison between the two is that there is slightly less paperwork involved with a SEP-IRA, and there is a little difference between the two with contribution thresholds.  However, the main benefit of the Individual 401k is that it keeps your IRA basis as zero.

Let’s let that sink in.

Contributing to an Individual 401k instead of a SEP-IRA keeps your IRA basis as zero.
High income professionals who want to contribute to a Roth IRA essentially fund a non-deductible IRA first and make a Roth conversion.  If you have invested funds in an existing non-Roth IRA (i.e. SEP-IRA), you will be taxed on any gains when you make a full conversion.  You don’t want that.

You might also like: How to reduce your taxes with combined W2 and 1099 income

We’re going to talk about opening an Individual 401k at E*Trade today.

Why I use E*Trade

Note: I do NOT have any affiliation with E*Trade, and do not receive any compensation for discussing their products.  I am just a happy customer.

I have too many investment accounts with different custodians to keep track of.  But the advantage of having too many is that I get to compare the customer service options of each one.  I opened an E*Trade brokerage account decades ago to buy individual stocks, but at least several dozen other brokerage firms now offer lower trade fees.

However, the two strengths of E*Trade is that (1) customer service can be easily reached either via telephone or their online messaging system, and (2) my account was opened without having to speak to anyone over the phone to clarify any details.  Time is the asset that we can’t get back, so being able to automate any process will save you a lot of headache.

The Individual 401k application is a single form

Okay, so the application with instructions are 21 pages total, but that is essentially all I had to fill out to complete the application. You can find the application on the E*Trade website.

The application is self-explanatory, but here are a few pointers:

  • You need to have your EIN, which you can obtain from the IRS (and should have before you even began to collect income for your services).
  • As a self-employed solo physician, you are both the employer and employee.
  • Your tax entity will be likely a sole proprietor, S-corporation, or LLC.  The LLC is pretty much a pass-through entity that is taxed like a sole proprietor or S-corporation.
  • Pick a date that you want the investment program to begin.
  • You have even choose a vesting schedule for employees and other more complicated options that don’t really apply to you if you are working by yourself.

How much can you stash away in the Individual 401k?

The 401k consists of the employee and employer portions.  The employee limit for 2021 is $19,500, but this amount is the limit across all of your 401k’s. What this means is that if you have a W2 job elsewhere and are funding it fully to the $19,500 limit, you cannot contribute the employee portion in your Individual 401k.

However, the beauty is that you can contribute 25% of the gross income of your business to the employer portion up to $58,000!

So if you were to have an income stream as such:

Employed W2 job income: $100,000

Self-employed 1099 job #1 income: $250,000

Self-employed 1099 job #2 income: $250,000

You could have a 401k from the W2 job, and two Individual 401k’s, allowing you to save this amount pretax:

W2 401k: $19,500 (if you’re lucky, your employer will match a certain percentage)1099 Job #1 401k:

$58,000, all from employer contribution (25% of $250,000 is $62,500 but you can only contribute the limit)

1099 Job #2 401k: $58,000.

Sure, your gross income from this scenario is $600,000, but this scenario allows you to save $135,500 from being taxed! At marginal federal and state tax rates, that could mean over 50% of that income!

In summary…

You can see that the barrier to entry in an Individual 401k is not that high. The biggest hurdle is getting over filling out the form and troubleshooting if you run into a snag. We’ve all signed up for online accounts, and this is no different. The tax benefits can be substantial, and it pays to be aware of the tax system.

Aside: some of you experts in the tax arena may astutely point out that the physician mentioned in the example above could save even more money by opening a defined benefit plan structured by a financial professional. True, but it all depends on how stable the income is and how long the income stream will last. There are significant up-front costs to a defined benefit plan and are only worthwhile if you intend to bring in substantial income long term.

Questions? Comments? Sound out below!

Note that none of the content discussed in this article construes medical or legal advice.  The content is only to be used for entertainment purposes only.  If you have medical or legal  questions pertaining to your job, please consult a licensed professional in the topic of concern.

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