401k

Our 2018 Savings & Investing Plan

2018 is well underway. Last year, M and I had a good amount of tax advantaged retirement “pots” available to us along with some employer match and contributions:

  • My 403(b) + generous employer match + contribution
  • My 457(b)
  • My cash balance plan
  • My backdoor Roth IRA
  • My solo-401(k)
  • His 403(b)
  • His Roth IRA
  • His solo-401(k)
The pots totaled close to $90,000 of tax advantaged space – not bad! With our move I lost some unvested money in the 403(b) and completely lost the cash balance plan. At the same time, I took advantage of the ability to contribute to a Mega-Backdoor Roth IRA and was able to contribute about $8,000 into that. Now we have new jobs and slightly different available pots this year:
  • My 401(k) + employer match
  • My solo-401(k)
  • My backdoor Roth IRA
  • My HSA
  • His 401(k) + employer match
  • His Roth IRA (may need to backdoor it this year)
  • His family HSA
  • Our taxable account
Our pots this year total around $80,000 + additional into a taxable account this year. We hope to bring our total 2018 savings to > $100,000. You'll notice that we now have access to a health savings account (HSA) plan via a high deductible health plan (HDHP). M's job allows unmarried partners to hop onto benefits at very affordable premiums. It was a no brainer to sign up our whole family. Since we are not married, we are able to take advantage of two HSAs – individual ($3,450) for me and family ($6,900) for him. We do not intend to actually use it for deductibles. We will be using it as a Stealth IRA or use it for medical expenses in “retirement.” Our asset allocation will remain the same as last year:
  • 68% US stocks
    • 17% Large cap growth, 17% Large cap value
    • 17% Small cap growth, 17% Small cap value
  • 24% International stocks
    • 12% Large cap developed countries
    • 12% Diversified emerging markets
  • 8% US REITs
Most of our accounts are with TD Ameritrade. You may have heard that they updated their commision-free ETF list and removed all the Vanguard ETFs. Bummer. So our FA has developed this new portfolio that closely mirrors the prior portfolio: We will be opening our taxable account at Vanguard. What do you think? Comment below!]]>

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Surviving $350,000 of My Biggest Financial Mistakes

I've estimated that these mistakes have cost me at least $350,000. Meaning that if I didn't make them, I'd have at least that much more money saved. Big sigh.

Here are the biggest financial mistakes I've made and survived to date:

#1. Cashing out my old work's 401(k) plan & selling company stock

I started a coveted job at Morgan Stanley in 1999 right after college. It was the height of the tech boom. My starting salary was $50,000 + a small guaranteed bonus. (I made the same as a resident in 2012!) My first 6 months was in London with all expenses paid.

I was an ex-pat there – meaning I was paid my U.S. salary but received free housing (picture beautiful 2 bedroom, 2 bath furnished apartment with marble bathtub, heated towel stand across the street from Hyde Park, neighboring the Grosvenor House) and a generous cash per diem. I did not have to spend any of my actual salary to live in London.

Now I don't totally regret this part – I was able to explore Europe on the weekends – weekend trips to Paris, Spain, Amsterdam. Priceless. Back then, friends and family from NYC could visit me in London for less than $400 roundtrip.

Plus, I had access to a 401(k) plan for the four years I worked there. I'm pretty sure I didn't max it out, but I still had a nice chunk in that account.

Still, I cashed it out in 2004. Yup, it gets worse. In addition to a company match, we also got free stock as part of our retirement plan. I sold it.

#2. Barely saving despite high earnings as a 22 year old

I listed my starting salary in mistake #1. About 1 year later, I got a $22,000 raise and a $25,000 bonus. This meant I hit 6 figures at the tender age of 23.

My only wish is that I had some savings to show for that! I lived paycheck to paycheck despite a high income. I guess I can blame NYC.

#3. Racking up $20,000 in credit card debt before starting dermatology residency

Yeah …. someone went a little nuts during intern year in NYC. I had awesome clothes, though. I paid it all off before graduating residency. Thankfully, I no longer carry any credit card debt and pay off cards in full every month.

#4. Not funding a Roth IRA until 2014

The Roth IRA was enacted in 1997. I've been earning money since at least 1992, so I'm not even counting opportunities to fund a regular IRA prior to that!

I actually never heard of the Roth IRA until sometime during residency so I feign ignorance prior to that. I couldn't imagine forking over $5,500 a year as a resident, but I totally could have.  This is especially true because I moonlighted most of residency.

#5. Not paying off student loans during residency

Every year during internship and residency I meticulously applied for deferment or forbearance on my student loans. Isn't that what everyone does? Apparently not.

By the end of residency in 2015, I had almost $50,000 of interest capitalized onto my loans.

Surviving My Biggest Financial Mistakes

You can always earn more income, but you can't create more time. That's why some of these financial mistakes really sting.

Despite these awesome mistakes, I should be able to reach Financial Independence within 15-20 years and pre-Financial Independence within 10 years or less.

Feel free to share your mistakes below!]]>

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The Solo 401(k)

Starting a Solo 401(k): The Solo(K) Series Continues

the many benefits of a solo 401(k) and the necessary conditions for opening one. So now you're convinced you need to open one. Here are answers to some common questions you might have about starting a solo 401(k).

What about the SEP-IRA?

Before you decide on starting a solo 401(K), let's discuss another retirement account.

You may have heard about the SEP-IRA (or just SEP) as another retirement account option for the very small business. The SEP-IRA has the same contribution limits as the solo-K, but contributions are made by the employER only. Additionally, SEP-IRAs do not allow for Roth contributions.

While you can contribute the same amount to a SEP as you can to a solo-K, having a SEP-IRA (since it is a pre-tax IRA) will prevent you from contributing, tax free, to a backdoor Roth IRA.

So, why would you open a SEP-IRA instead of a solo-K?

The main reason is that a SEP can be opened after the calendar year for which it applies. You can wait until your tax due date, including extensions (around October 15th), to open and fund a SEP-IRA.

For example, you have until 10/15/19 (with an extension!) to open and fund a SEP for 2018. (Even if you have already filed your 2017 return and didn’t know this rule, you still have time to amend your return and open a SEP for 2017!)

By contrast, you must open a solo-k by the end of the calendar year it is for. A very minor reason to open a SEP over a solo-K is that the paperwork to open a SEP is simpler. But don't do it just because you're lazy!

Contributions to either a Solo-K or a SEP are based on net profits adjusted by FICA taxes (Social Security + Medicare taxes). The contributions to a Solo-K and a SEP are the same if you have already made your $19k employee contribution at work. Otherwise, you can add what remains of your employee contribution, up to $19k/$25k to the maximum Solo-K contribution.

What should I consider before starting a solo 401(k)?

There are a few good solo 401(k) choices with low to no fee plan options. They differ mainly in:

  • Fees: Some are free, some are not.
  • Traditional vs. Roth employee contributions: Not all will offer the Roth option.
  • Rollovers: Not all will accept rollovers from old IRAs, 403(b)s, 401(k)s. This is a deal breaker, in my opinion, since the ability to do this is one of the great reasons to have one.

Thankfully, someone else already did a great and thorough review on the most popular solo-K options.

Where should I open my solo-K?

Here are my top 3 picks:

  • TD Ameritrade: Offers a Roth option. Has a good list of commission-free ETFs including many Vanguard ones. M has his solo-K here and I plan to open one here too.
  • E-trade: Offers a Roth option. Lots of free funds.
  • Fidelity: No Roth option. Lots of free funds and ETFs.

All of these accept rollovers of old IRAs, 401(k)s. Some offer loans (which I don't recommend ever doing), too.

At this time, I do not recommend opening a solo-K at Vanguard for two main reasons: they do not accept rollovers (deal breaker) and you can only invest in their investor share class funds. These funds have a higher expense ratio than their admiral class fund or ETF equivalents. They also charge a $20 fee per fund in the account annually until you reach a balance of $50K.

Final Thoughts on Starting a Solo 401(k)

For many of us, starting a solo 401(k) is the right money move.

If you're still not sure, review the impressive benefits of a solo 401(K) and determine if you qualify. But maybe you're already wanting to get started. Today is the perfect day to create that investment account.

Follow the steps outlined above and then drop us a note below to let us know how the process went. Your future self will thank you for not putting this off any longer!

Do you have a SEP or a solo-K? Are you planning on starting a solo 401(k)? Comment below!]]>

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4 Amazing Solo 401(k) Benefits

why I love the Roth IRA. I also love the Solo 401(k). If you're looking for another way to save for retirement, you want to check out these Solo 401(k) benefits.

What is a Solo 401(k)?

But first, it's important to understand what a Solo 401(k) is. Also known as an individual 401(k) or solo-K, a Solo 401(k) is a tax-sheltered retirement account for really small businesses–just you in fact. This two-part series will discuss the solo-K in the context of having a main job (w2) and having a side job with 1099 income, such as moonlighting, a blog, completing medical surveys, etc. Although, the benefits will also apply if you have 1099 income alone as well. With a really small business, you are considered to be both the employEE and employER.

What Are The Solo 401(k) Benefits?

Like all retirement accounts, it pays to really understand what you're signing up for. If you found yourself nodding along to the criteria above, you're in luck. You could start reaping all the benefits of a Solo 401(k) right away. Here's what to love about them:

Benefit 1: Ability to contribute up to $56K*

You're limited to a maximum $19K employEE contribution through your work-sponsored 401(k)/403(b). The IRS allows your employer to make additional “profit-sharing” contributions of $37k for a total of $56k. Unfortunately, while many of us have employer “matches”, we don’t work for employers with profit-sharing plans. But if you open a solo-k for your small business, you can make both employEE and employER contributions up to the current max of $56K. Keep in mind that if you have multiple work 401(k)s, you're limited to one $19K employee contribution across all accounts. But you can make “profit-sharing” contributions of 20% of net income to your solo-K even if you’ve contributed $19k as an employEE. Like regular 401(k)s you can elect pre-tax (or traditional) employee contributions or after-tax, or Roth contributions. Employer contributions are always pre-tax.

Benefit 2: Ability to hire your spouse

This is a great perk if you have a stay at home spouse who would only have access a spousal Roth IRA. Hire your spouse and s/he will be able to contribute $18K as an employee. Win-win

Benefit 3: Ability to roll over other retirement accounts into it

This is huge. As life goes on you'll change jobs at least a few times. This often leaves a trail of “orphan” 401(k’s)/403(b’s). You may have rolled over one or more of these into an IRA or two. It can get really messy. Not to mention that you're probably paying a maintenance fee for all of the accounts. Set up a solo-K and you can roll all these orphans into it, consolidating everything into one account. Less paper, less emails, and easy to keep track of your investment plan. It's retirement account decluttering at its best.

Benefit 4: Ability to contribute to a backdoor Roth IRA without being subject to the pro-rata rule

After you move all your old accounts (namely, anything with “IRA” in the name), you now have a clean slate to begin contributing to a backdoor Roth IRA. If you have any other non-zero balances in any IRA account, you’ll be subject to the pro-rata rule if you contribute to a backdoor Roth IRA, which means you’ll pay unnecessary extra taxes. Not good. You're convinced you need one now, right? I thought so.

While the Solo 401(k) benefits probably have you ready to open an account, there are a few other questions worth addressing first.

Can I open a Solo 401(k)?

Maybe or maybe not. You need earned income, typically as an independent contractor (IC). If you own an S-corp with no employees, this would come from your W2 income. For physicians, however, this is typically IC income from moonlighting, income from surveys, speaker fees, etc. If you don't have any of these now, you can find this kind of work pretty easily.

I only made $1000 of IC income. Is it worth opening a Solo-K?

Yes and yes! You need only the minimum a custodian (aka brokerage firm) requires to open a solo-K. There are no “required minimum” contributions to make to a solo-K. It is worth opening for the ability to roll over other retirement accounts into it (see #4 above).

What else do I need to know about Solo 401(k) plans?

  • Once the balance in the solo-K reaches $250K you'll be subject to some compliance measures including filing form 5500 with the IRS annually.
  • You need to open the solo-K by 12/31 of the calendar year but you'll have until tax day, including extensions, to fund it. So the absolute latest you can fund it is by 10/15 the following year.

Final Thoughts on Solo 401(k) Benefits

If you're feeling like you haven't arrived yet with your 1099 income, remember that you don't have to make huge contributions to start a Solo 401(k). Savings and retirement are all about options. Giving yourself access to another way to save for the future is priceless.

Read on for the second part of this topic where I'll discuss why you should choose a solo-K over a SEP-IRA and where you should open your Solo-K.

*2019 limits. If you are age 50+, you can add another $6k to your employee contributions.

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