Retirement accounts for self-employed folks?


#1

For those who are self-employed, how and where are you investing for retirement?

My wife and I are on our 3rd year of full time self-employment. We will be debt free Q2 this year and will start investing for retirement again, only this time it won’t be with a company 401k. So we need to figure out the best place to open up these new accounts.

Any advice is welcome.
Links to posts or websites are great too!

Thanks!
-d


#2

I use Charles Schwab as that is who my company uses. I have never had any problems. I also hear good things about Vanguard and Fidelity. I think POF who posts here uses both of the latter ones. :O)


#3

@PoF Any thoughts?


#4

I use Schwab because that’s who I’ve used for my personal accounts & Roth IRA, prefer their research platform, and like their various mutual fund & ETF offerings.

For the funds I want to invest in now, I was able to Schwab equivalents that are nearly identical to Vanguard thanks to the help of this forum.

I almost did go with Vanguard because so many people use & recommend them. The one fund I had my eyes on with them was the VTSAX/ VTSMX total market mutual fund. It has a market cap somewhere near $50 BILLION. The Schwab version, SWTSX, is somewhere around $5 Billion. It’s the same for many of their other funds.


#5

If you’re thinking Solo / Individual 401(k), I just opened one with eTrade. Fidelity is good, too. Vanguard doesn’t give you access to admiral funds or accept rollovers.

For SEP-IRA, I would go with your favorite fund family. I used to have one with Vanguard, and converted it all to Roth in 2010.

The @WhiteCoatInvestor discusses those two options in this excellent post.


#6

Very helpful thanks.


#7

We have Sep-IRAs (and Traditional IRAs) at TD Ameritrade. They have a bunch of commission-free ETFs, including Vanguard goodies like VTI and BND.


#8

@DerekOlsen I left our broker last year and his 5,77% sales charge, and opened my own account through Vanguard this year where I can buy my own funds sales charge free. Since it was my first retirement account, I just tried out their, VTIVX Vanguard Target Retirement 2045 Fund Investor Shares. I own a pretty nice chunk of VTSAX taxable liquid shares, so I am comparing how the VTIVX shares perform to my VTSAX and learn from this experiment this year, so I can figure out what I want to do next year.

@PoF Do you have an opinion on target retirement funds like the one I bought, comparing it to 100% stock index funds?

I also talked to Vanguard before I bought them, and at any time, I learned that I can trade them internally without a penalty, and buy a different fund, so I thought I may as well try something else so I can have experience and comparison with the funds I am already happy with. It’s not like I was going to be stuck with them forever.

I own a mixture of Roth IRA and IRA. Since I am self-employed, my taxable income guides many of my health insurance decisions I have to make, so I usually wait until the end of the year and just see where my income is at before I decide on if I go Roth or not, depending on how it impacts my insurance options.

I was interested in opening my first SEP this year, but it was after the October 1 deadline, so I was unable to. So be aware of that deadline. Although, this year seems to have worked out fine for me. Hope that helps.


#9

I started with Target Date Retirement funds, and you’re right that you can swap them out for different funds with no tax consequences.

Two arguments against them (not strong arguments, though) are that you pay a slightly higher expense ratio compared to buying individual funds yourself, and that owning them makes calculating and implementing an asset allocation across multiple accounts more difficult.

The expense is still quite low with Vanguard and it’s easy to look up what you own within the fund.


#10

Totally. I looked at the pros and cons and math of expense ratios before buying it. My VTSAX expense ratio was .05, comparing that to the .16 expense ratio of the retirement account. Since it was my first retirement account through Vanguard, that expense ratio was a relatively small number. For example, my wife and I put 11K in this year. The account maintence fee was going to be $5 compared to $17. I’m frugal, but I thought for $10 extra maintence fee, I could try new funds out and learn from them, as I personally learn the best from experience. I thought that learning was easily worth $11 for me so that’s why I did it.


#11

Exactly - fees are low either way. I’m not opposed to the target date funds. They make sense for a lot of people. I’m more sensitive to fees, but you’re keeping them low either way.


#12

Target Funds are also good when you’re starting out and don’t have the $10K needed to get into an Admiral class like VTSAX. VTMSX’s expense ratio is 0.16% … the same as a Vanguard Retirement Funds.


#13

Hey @BiglawInvestor SO what would you do in my situation? I can transfer other retirement accounts of mine over to Vanguard and afford admiral shares fairly easily. Once I have that money in vanguard, would you still recommend that I keep it in Target Date Retirement Funds, or should I keep it in a mixture of lower fee stocks and bonds that I can pick myself.

I do hold a nice chunk of VTSAX admiral shares in a taxable account, and I have been very happy with that account. But for my retirement account, I am a little more conservative, since it is my retirement, and I was apprehensive to go 100% in VTSAX with all my money before experimenting and researching more.

I am assuming that I could go 100% VTSAX when I am still relatively young (36, my wife is 28), and then up my bond percentage to be more conservative as I get older and closer to true retirement age.

As I was just starting to do it on my own, I thought I’d be safe with my retirement money, and that’s why I chose target funds.

Thoughts?


#14

A standard reply, but you need an Investor Policy Statement, or at least a desired asset allocation.

My wife and I are about 5 years older than you guys. We’re 90 / 10 and I don’t envision that changing drastically in the future. I’ll probably ramp up bonds to have 5 years’ in expenses in bonds at retirement, and maintain that throughout. As a percentage, bonds may decrease over time, assuming the portfolio grows.


#15

Awesome. Thanks for all your help. I’ll dig into it this weekend. It’s 60 degrees in Minnesota today, so I’m about to go take a LONG walk outside as we haven’t seen weather like this since October.


#16

I opened up a Solo 401(k) with Fidelity. They’ve got great, low cost fund options. And they don’t even have administrative fees. Just pick the Fidelity version of the total market fund and you’re all set (I think it even has lower expense ratios then Vanguard - hurray for competition!)

The reason I prefer the Solo 401(k) as opposed to a SEP IRA is because you can put way more money into the Solo. The other big benefit is that you keep that IRA space open in case you need to do a Backdoor Roth down the line. If you go with the SEP, you basically screw up your backdoor Roth options.


#17

Very helpful! Thank you!


#18

Ack, they don’t? I’d love to use Vanguard if I do a Solo 401(k) because it would just be so much easier to keep everything under one roof (our IRAs are with Vanguard currently).


#19

The awesome thing about Fidelity is that it has no fees and you should be able to invest in FSTMX, which is a total market fund that charges just 9 basis points. I’m not exactly sure how Fidelity doesn’t charge fees for its Solo 401(k) - seems like it must be a loss leader for them, but works for me anyway!


#20

Not to do a shameless plug, but if you’re interested in some more background, I wrote a brief post on the Solo 401(k) back in December, including a little info on how I set up my Fidelity Solo 401(k). Hopefully it could help you out!