Previously I blogged about the different self-employed retirement accounts and the different options for opening a solo/individual/self-employed 401k. I’ve been waiting for Vanguard to unveil an individual 401k to begin investing my self-employed income in a retirement plan. I originally heard rumblings of Vanguard launching it’s first individual 401k at the beginning of November. Today was the first day I was able to find any information on Vanguard’s website. I’m pretty excited about opening a Vanguard individual 401k and will do my best to detail the account details and benefits below.
Individual 401ks are available for self-employed individuals such as, sole proprietors and LLCs. This retirement plan will cover the plan administrator, partners and the spouse of the business owner. This plan does not cover individuals with common-law employees such as children. There are also no age and service requirements.
Plan administrators set-up an individual 401k plan and administer the plan through Vanguard Small Business Online. There are three types of contributions allowed: employee salary deferral contributions, Roth salary deferral contributions and employer contributions. This means Vanguard offers a Roth individual 401k for those who prefer to invest after-tax money. The Roth individual 401k does not have income restrictions like a Roth IRA. Total contributions for a fiscal year are $46,000 or $51,000 with catch up contributions.
Sole proprietors may contribute up to 20% of net compensation. I am able to defer up to $15,500 as my employee contribution and up to an additional 20% of my net compensation. I will be able to contribute nearly 100% of my self-employed income. I am still on the hook for one half of the self-employment tax.
The investment options are the reason why I have waited patiently for Vanguard to launch an individual 401k. There are over 70 Vanguard funds available for retirement investing. None of these funds have sales commissions. Vanguard is notorious for delivering mutual funds with minimal expense ratios. They also provide target retirement funds and LifeStrategy funds. Target retirement funds automatically move funds from stocks to bonds as you get closer to retirement. LifeStrategy funds vary the ratio of stocks to bonds to cash reserves depending on how aggressive you want to be and how far away your savings goal is.
Employers will be able to manage the retirement plan through Vanguard Small Business Online. Employers will be allowed to make contributions, review the transaction history and download forms via this online interface. Employees will have access to account balances and planning tools.
A plan administrator must be designated for an individual 401k who must maintain records and submit reports (including Form 5500 when income exceeds a certain level). As a sole proprietor I would be the plan administrator, however, they recommend a co-plan administrator to act in the absence of the plan administrator.
Vanguard will not be charging an account initiation fee to the employer and there is no minimum investment to open the account. Some funds do have minimum initial investments. Vanguard mutual funds average expense ratios of 0.20%, which is always applied. An account service fee of $20 is required per year for each Vanguard fund in the account. The account service fee is waived when you become a Voyager member (total account assets of $100,000). Only two Vanguard funds charge purchase fees, however, a slightly larger number charge redemption fees if you remove funds within a certain time period.
For individual 401ks, the standard distribution penalties and rules apply. If you are under 59.5, you will be subject to taxes and IRS penalties unless you meet certain restrictions. If you are between the ages of 59.5 and 70.5 you are only subject to income taxes. If you are over 70.5 the IRS requires minimum withdrawal distributions. For Roth individual 401ks, the standard distribution penalties and rules apply. If you are under 59.5 years of age or it has been less than 5 years since the first contribution, your money may be subject to income taxes and penalties. If you are over 59.5 years of age, distributions are tax free. At age 70.5, the required minimum distribution kicks in.
I have to set up my individual 401k by December 31st in order to participate for fiscal year 2008. I still have until the income tax filing date to fund the account for 2008. The website has a link to request a Vanguard individual 401k New Account Application either online or by mail. The link currently is not working. I will call the small business unit of Vanguard tomorrow to request an account application as I have been waiting for awhile to open this account and would like to get the ball rolling so I don’t miss the December 31st deadline.
In my opinion Vanguard is the best place to keep your retirement accounts. I already have my Roth IRA with Vanguard and am thoroughly enjoying the bare bones expense ratios. I’m currently reading Bogle’s book on mutual funds, which hammers home the point of keeping all costs to a minimum, and he certainly follows through on that at Vanguard. I will keep you all updated when I have more information regarding the application process.
- Solo 401k Retirement Account for Self-Employed Income
- 10 Steps to Retire a Millionaire
- Financial Goals Update as of October 1, 2008
- IRA Contribution Rules and Limits for 2008
- Goals Update for End of January 2009