Burnout (and subsequent guilt about the burnout)

After only a year, I began to feel symptoms of (what I learned later was) burnout. According to WebMD, burnout is the condition in which, after extended periods of feeling “swamped,” you’re unable to escape feelings of general overwhelm. 

I didn’t understand why I felt this way. I found myself struggling to stay focused, needing frequent breaks, feeling tired all the time, and having emotional flare-ups over work stuff. 

It sounds whiney, I know—working a “fake email job” in a climate-controlled office would hardly register as “work” to my meatpacking ancestors who probably stood knee-deep in questionable fluids for 12 hours each day, but something felt inescapably meaningless about the barrages of email threads, Powerpoint decks, and back-to-back 30-minute “touch bases.” 

On one of my first work trips, an older colleague told me, “You have to remember that perception is reality. Even if you’re doing a great job, if someone sees you at your desk scrolling on your phone, leaving early, or coming in late, they’re going to think you’re not working hard. People talk.” 

You’d think working from home for three years would’ve helped to alleviate this (and in some ways, it did!), but the Wall Street Journal pointed out that the reason we were all working from home (and how) meant these feelings intensified. 

The expectations at work didn’t slow or cease because we were taking calls from our living rooms. The pressure to prove we were still working hard in the face of furloughs escalated, and new “productivity” software emerged to fill the gap: Microsoft Teams, the proliferation of Slack and Zoom, and other chat apps that meant you were now accessible at all hours of the day and night. Ironically, this somehow replaced actual productivity with a sort of endless toiling; LARPing your job as opposed to actually doing it.

It became clear to me early in my career that it wasn’t enough to just work hard—I had to look like I was working hard. Work meant two things: Actually performing, and performatively performing. The latter was more exhausting than the former.

The crazy part? 

All things considered, I had a great job. I had (what I thought was) my dream job, so I couldn’t pinpoint the source of my existential dread.

I vastly underestimated how mentally draining—yet somehow bizarrely un-stimulating—it would be to work 9–5 in a big corporate setting. 

And nothing makes burnout worse than feeling guilty about feeling burnt out. My guilt (“I should just be grateful I have a job at all!”) intensified as more time passed.

I had been so excited to begin my career that I couldn’t understand why (only a few years in!) I was already feeling disillusioned. I was a sitting duck for financial independence propaganda.

None of this would’ve mattered if my livelihood hadn’t literally depended on it

In retrospect, it’s clear the exhaustion was a byproduct of my personal safety and security being wholly tied up in not just the job, but also in others’ perceptions of me.

The constant maintenance of perception (or occasional bouts of apathy) wouldn’t matter so much if our livelihoods didn’t feel like they depended on those perceptions. 

You could make the case that none of this stuff would’ve actually been materially detrimental to my career or impacted whether or not I received a paycheck—but tell that to a neurotic 22-year-old with no money who doesn’t know any better and just signed her first 12-month lease. 

It’s no wonder the financial independence movement became so attractive to me, because it promised both freedom and reprieve from all of this posturing. 

There’s just one rather obvious problem: It can take a really long time to achieve. So long, in fact, that many young people throw in the towel before they begin—ironically enough, the polar opposite approach to “gunning for financial freedom” is “conceding in the first inning that you’ll never reach it and just spending everything you make while the going’s good.”

As writer Kayti Christian points out, it’s pretty challenging to get off the hamster wheel when the hamster wheel pays your bills, but the fundamental mistake is allowing those bills to swell larger and larger, rendering the hamster wheel that much more necessary. 

Most of us do not freely choose to engage in behaviors that lead to burnout, we engage precisely because we feel we have no other choice. 

It feels as though we can’t turn our back on the late-night email or the unread message, because what if that person gets angry and then what if someone else finds out you’re not responsive and then what if next quarter you don’t get promoted and then what if you can’t afford your mortgage and what if, what if, what if—

Our security is so intrinsically tied to our jobs that disengaging when feeling burnt out doesn’t seem like a safe or responsible option. If we lose our jobs, we don’t just lose our income: We lose our healthcare. We lose our retirement plan (or rather, the ability to contribute to one). We lose our identity, in some cases. 

Sometimes, it’s hard to deny that true safety and security in the US often looks a whole hell of a lot like just having a bunch of money.

When we talk about this in the context of financial independence, we usually mean the ability to do something extreme—like quit a job. But my perspective on true independence has evolved: It’s not about disengaging completely, forever. True independence is more impactful than that. It enables you to move about your work and life in a way that isn’t rooted in fear of it all crashing down. 

We move through life differently when we’ve self-insured our own safety and security. 

“I don’t need this” is a life-changing perspective with which to approach your career. It allows you the ability to change paths at any time—and money grants you access to that gated area of invincibility behind the velvet rope more directly than just about anything else. 

This is the moat that money can build around you. It’s permission to separate your work—your livelihood—from your most fundamental needs, and behave accordingly. Saying what you actually think, taking time off when you actually need it, and doing what you actually want to do. 

This is why I pursue financial independence. Not because I think next week (or even next year) my moat will be wide enough, but because it never will be if I don’t keep digging. 

Money is power—and it’s the kind of power you can seize for yourself with enough saving and investing. Nobody in upper management has to give it to you. 

Is it the S&P 500’s performance over time? 

Close! It represents searches for the term “S&P 500” over time. 

Why am I looking at this? Well, mostly because I don’t have other empirical ways to get a pulse check on public awareness of a phenomenon beyond Google Trends data. I’m using increasing search volume as a proxy for public interest in the S&P 500 (the index that measures the performance of the 500-odd largest American companies by market capitalization).

Now, we could explain away this increase a few different ways:

• The Google search trends data (and the methodology that Emperor Google uses to measure search trends) have changed over time, calling into question the accuracy of such a graph.

• Personal finance education has become more popular in the last decade, in part due to the internet and social media.

In short, we could explain the increasing interest in the S&P 500 over the last few years with other stories. Or we could compare searches with actual performance:

Note the delineation for 2004, where the search trend data above begins. 

Correlation does not equal causation, but there’s a simple explanation I’d like to offer here: Recency bias.

Line goes up. People take notice. New investors are attracted. Narrative is formed. (Also known as: Fund flows tend to follow—that is, chase—returns. When something is performing well, it attracts a ton of new cash (Cathie Wood’s ARKK being the most recent, microcosmic example.)

Because the S&P 500 has performed exceptionally well in the last decade (and we’ll get into that shortly), it’s a fan favorite for investors everywhere.

Over time, a very cozy narrative has developed around the S&P 500 and its annualized 9% returns, lulling investors into a dangerous “expectation trap.”

When money is cheap, growth stocks generally pop off

There’s a general consensus in the investing world that there’s a correlation between the Federal Reserve’s monetary policy (specifically, interest rates) and stock market performance. For example, this analysis from BlackRock demonstrates how S&P 500 P/E ratios map to interest rates over the last 12 years; when rates are negative, P/E ratios tend to be higher, and vice versa.

When the cost of borrowing money is cheap, the thinking goes, we expect future earnings—and returns on stocks, the securitized devices that represent a company and its earnings—to be higher. 

When the cost of borrowing money rises, we expect future earnings and stock returns to be lower.

There’s a loosely inverse relationship. 

And what do we know about the last 10 years? A picture’s worth a thousand words! Below, you’ll see the Federal Funds Effective Rate—a bunch of fancy words that basically mean, “How expensive is it to borrow money?”

The higher the line on the graph, the more expensive money is. Check out the line post-2008, especially relative to the previous 60 years:

Things have been awfully ZIRP-y. 

(ZIRP is the acronym for “Zero Interest Rate Policy,” an approach to monetary policy that tries to jumpstart economic activity by making borrowing money really cheap. In other words, the interest rate is at, near, or sometimes even below zero.)

It’s true that this correlation (between high returns and low rates) exists, but it’s also true that—at other points in history—reality flouted this expectation. Between 1940 and 1969, rates rose and the S&P 500 had positive real returns.

In that sense, it’s not quite as simple as “one goes up, the other goes down,” though this intuitive narrative is very powerful.

I don’t want to get into the ~economic theory~ or effectiveness of ZIRP, or how it played out for us. That would be fun (really!), but what I’m more interested in is exploring how a new era of higher interest rates is likely to shift the narrative sentiment (and therefore, investor behavior) around things like the S&P 500. 

Is narrative sentiment more powerful than data?

Do ~vibes~ and public opinion matter more than reality itself? Do vibes create our reality?! (I feel like I’m at Burning Man.)

To dig a little deeper into our earlier note about positive real returns amidst rising rates, LPL Financial released some data in March 2022 that showed the average annualized S&P 500 return during Fed rate hike cycles was 4% (in other words, lower than the historical average, but still positive) since the 1940s. 

In fairness, the data doesn’t appear to be inflation-adjusted, and you probably don’t really give a shit if your stocks are up on a nominal basis if they can buy less bacon at the store than they could last year.

For example, a quick review of S&P 500 returns at this site (where you can easily adjust time periods and include or exclude inflation) paints a very different picture of the period between 1977 and 1980 than the LPL data does:

Regardless, it almost doesn’t matter if rate hikes don’t actually meaningfully impact S&P 500 returns, if everyone investing in the stock market thinks (and behaves!) as though they do.

Data is often no match for the narrative that forms around the data. A compelling, intuitive story is often more powerful than fact.

The end of an era: The “safe bet” of the S&P 500 might be over, for now

When rates are continuously ripping and J-Pow refuses to step away from the “CHAOS & VIOLENCE” button that adds another 50 basis points to the Fed funds rate every few months, we’re going to see a gradual narrative shift in investing circles that moves away from presenting the S&P 500 as a “safe” option. 

This is probably a good thing. While you’re historically likely to see real returns over any given 20-year period you’re invested in the S&P 500, we humans have a tendency to take a look at recent history and extrapolate it forward.

Writer and investor Nick Maggiulli points out why this is a dangerous inclination in his recent piece, “How Much Growth Can You Expect?”:

“I wanted to share these results because there are many personal finance gurus who will advertise expected growth numbers far in excess of [real returns] and it can be quite misleading. Most of the expected growth numbers I see tend to be inflated for a few key reasons:

They don’t examine people investing over time (i.e. DCA)

They don’t include bonds in the portfolios (it’s 100% stocks which is unrealistic)

They don’t include Global stocks (they focus solely on U.S. stocks)

They don’t usually adjust for inflation.”

To quote myself five minutes ago, you’re probably more interested in a realistic estimate for future returns that’ll accurately reflect the type of life they’ll enable you to live than some pie-in-the-sky, relatively unlikely outcome.

Am I going to save as aggressively if I think I’ll get 11% annualized returns? No, probably not. 

What if I plan as though I’m only going to realistically 2x my savings over 20 years (around 4.5% real annualized returns)? Well, I’d probably save a little differently. 

Again, this is a good thing.

“Save like a pessimist and invest like an optimist,”

wrote Morgan Housel, the connoisseur of “human behavior really jacks up our finances, huh?” hot takes.

While I’m sure we all enjoyed the era of S&P 500 dominance (also correlated with the Alabama dynasty of Saban’s joyless murderball, I might add!), realistic expectations for the future matter, because they influence how we behave, plan, and save.

And diversification beyond a single asset class really matters, because the S&P 500 alone is not a surefire bet, even over relatively long periods of time (despite what our recency bias-tainted amygdalas may tell us)—go back just one more decade and we can learn that lesson clearly:

This is real S&P 500 performance from 2000 to the end of 2011, though as Nicky Numbers pointed out above, this represents one lump sum of cash invested at the beginning, rather than a more realistic dollar-cost averaging approach.

Accurate or not, it’s high time for a narrative shift so this new generation of investors can benefit twofold

A more realistic set of expectations for future S&P 500 returns—and, by extension, a more realistic appreciation for diversification beyond it—is good for improving saving behavior, whether the narrative driving this behavior is data-driven or not. 

Moreover, deep downturns provide buying opportunities for younger generations (in both the stock market and housing markets) that aren’t possible when ZIRP pushes things to new, outlandish all-time highs every six weeks—anyone sitting on dry powder in 2008 went on an asset shopping spree that likely propped up the rest of their financial lives. 

Without these economic blowups and subsequent recessions, the rich stay rich and the young (and broke) get farther and farther behind.

So no, the S&P 500 isn’t “safe”—but if you save aggressively and diversify beyond it, you’d be hard-pressed to find a better way to build wealth. 

Our brains are hardwired to perceive negativity as more truthful, more intelligent, and as a result, fear-mongering tends to run rampant when things seem like they are Going Very Badly. 

The alarmists are harmonizing the refrains of their favorite Sunday hymnal, This Time It’s Different, explaining (some with earnestly positive intentions, to be fair) that investing in the stock market right now would be a no good, very bad idea. This is usually followed by something about “fiat, bitcoin fixes this, whole life insurance or bust” on a droning loop. They shoot down messages of optimism as uninformed or unsophisticated. 

Oh, how quickly we devolved from “Software is eating the world!” to “The only safe assets are physical bars of gold and Costco cans of Bush’s Baked Beans.”  

When the vibes are off, it can feel safer to heed our gut instincts that something dire is afoot, pause our contributions to our brokerage accounts, and wait it out on the sidelines. 

There’s only one problem: Our perception of danger in the markets is highly uncorrelated with how dangerous the market actually is at any given time. 

But…is it a “no good, very bad” outlook?

A few weeks ago, I saw a comment entitled “Hard Lessons Will Be Learned” from an Anonymous Internet Opiner. They declared with certainty: “The next 40 years will not look like the last 40 years because of where we are in the big debt cycle.”

Ray Dalio has entered the chat. 

“This lacks an understanding of macroeconomic trends.”

As soon as the tide turned from headlines of jpgs of rocks selling for $3 million to monkey-themed fan clubs to “the world is definitely ending” in nine months flat, it seemed internet comment sections were suddenly glutted with classically trained macro economists. 

r/WallStreetBets called; it wants its analysts back. 

But uh, do you know when we weren’t constantly wading through accusations of economic incompetence? When frequent conversations across the web didn’t co-opt Dalio’s talking points? When people weren’t beating the end-times drums? 

In 2020 and 2021, when—as my friend Jack pointed out in this brilliant piece—risk was technically much higher than it is today.

That’s the problem with our perception of danger. We think it’s a lead indicator—a warning sign that something bad is going to happen, and we should act (or stop acting). 

Unfortunately, fear is an emotion that functions on a lag. By the time we retail investors perceive the risk, it’s usually too late to do anything about it.

Back then, it was, “Have fun staying poor.” Today, it’s, “Macro trends tell us we’re headed for a flat decade.” 

The critical, pessimistic sentiment online tends to be late to the party. It probably would’ve been a lot more helpful to spread a word of caution in 2021, when the S&P 500’s PE ratio was pushing 40, just about as high as it gets, rather than now, when we’re already down 25% YTD and the S&P 500 is roughly half as expensive as it was last year, with a PE ratio of around 18. 

Right now, stocks are within one standard deviation of the historical average and are considered fairly valued by most measures. If anything, now would be the time to fire up the chorus of have fun staying poor, since the last two decades have proven that investing in something is just about the only chance regular people have of escaping chronic wage stagnation and declining purchasing power.

Of course, that’s not to say the market won’t go lower. That’s not to say there isn’t some macroeconomic trouble on the horizon. That’s not even to say this time it won’t be different, or that we aren’t headed for a flat decade—just that, all things considered, most of these doomsday Paul Reveres are about a year late. And ultimately? Nobody actually knows. 

Even if bad things are ahead (like catastrophic events of the past that preceded recessions from which the stock market eventually recovered—a Great Depression, a housing market implosion, a massive terrorist attack, a Gulf War, an oil embargo, or…well, I think you get the picture), we have a relatively solid idea of what typically happens when shit goes awry at scale, thanks to the last 100 years.

Stock market returns through recessions are less predictable than you’d probably expect

As much as I wish past performance was indicative of future returns…it’s not. That said, history is just about the only (hazy) crystal ball we’ve got for understanding a probable range of outcomes.

Moreover, the stock market is forward-looking—it’s not reacting to what’s already happened in the same way that our flighty amygdalas are. It’s anticipating what’ll happen six or 12 months down the road, which means it usually goes down before a recession actually starts (and usually improves before a recession ends). 

And one of the key recession indicators—high unemployment—isn’t really happening yet. (The technical language for this phenomenon is the “recession isn’t recessioning,” and J-Pow & the Fed Boiz are probably going to keep hiking rates until it does.)

This is why a strong jobs report actually made the stock market react negatively, because a strong-ish economy probably means more rate hikes. The market—comprising a bunch of smart, greedy people—is pricing in something it’s expecting to happen in the next few months. (You’ll never convince me the stock market isn’t just a mood ring in the short term.)

The chart below shows us that the range of drawdowns during recessionary periods in the last 72 years was between -14% and -57% (woof). But it also shows us the returns on cash invested at or around the low point two years after each “bottom,” ranging from 5% to 99%. (This means a dollar invested during the market’s lowest point in a recessionary plunge returned anywhere from 5% to 99% in the two years that followed.)

These ranges are about as wide as they come. The median drawdown, however, is -24%, which is approximately where we are right now. 

The point isn’t to estimate how bad it’s going to get—there are far too many variables for that—but to exemplify the fact that it’s almost impossible to know. There’s no discernible pattern to extrapolate forward. 

Is this the bottom? Who knows? The macro buffs would tell you we have much farther to fall (because of money printing, because of war, because of inflation, because of Jerome…or because negative press is what gets clicks), but nobody actually knows.

The one thing that is clear from this data is that the money you invested through every recessionary bottom in history always looks all right two years later, and the only way to guarantee you invest at the bottom is to invest through all of it.

Might as well bet on 100 years of historical precedent if you’re going to bet on anything. As Jack Raines wrote: “Risk is highest when we forget it exists, and lowest when it’s all we can think about.”

Maybe the Bear Bros will rejoice from their alternative asset classes that they were right and the dumb, optimistic masses were wrong—but if you’re coming to that conclusion in October 2022, you’re probably too late to do anything about it anyway.

Today, we’re going to break down the two most optimal account mixes for people who have both W-2 income and self-employment income from a side hustle (commonly referred to as 1099 income here forward, because I’m fancy like that, and so are you). One additional heads-up: This post will not address HSAs for simplicity’s sake, but I like those, too.

Got it? 

W-2 = wages from beneficent Corporate Overlord from which taxes are already deducted

1099 = income from side gigs from which taxes are not already deducted

Having both types of income opens you to myriad possibilities with respect to fancy tax footwork—so let’s dig into the best two combinations.

Combination #1: Employer-sponsored 401(k) or equivalent account + Solo 401(k) + Roth IRA/Backdoor Roth IRA

This is technically the most optimal from a tax standpoint, but a little more complicated, and potentially unnecessary. 

At first, this path seemed like the only universally viable one. Here’s why: 

• The 401(k) is flexible AF. It gives you the ability to make Traditional or Roth contributions, regardless of how much money you make (the IRA, on the other hand, has income limits associated). I’m personally a proponent of leveraging a Traditional 401(k) to cash in on those juicy tax deferrals.

• The Solo 401(k) is basically a duplicate of the W-2 401(k). Same flexibility applies here. You can contribute up to 20% of your net business income to your Solo 401(k) even if you’re already contributing the maximum to your employer 401(k) and the same “no rules!” free-for-all applies with respect to income limits. I.e., there aren’t any. One thing to note: If you’re contributing the maximum to your W-2 401(k), make sure your contributions to your Solo 401(k) are characterized as “employer” contributions (you’re your own boss, Queen!).  

• The Roth IRA or Backdoor Roth IRA add tax diversification. If you’re under the limit of what the IRS deems “high earner,” you’re in the clear to contribute normally to a Roth IRA. If you’re above that limit ($165,000 single earner or $246,000 filing jointly in 2025), you may be able to do a Backdoor Roth IRA. I say “may” because it’s contingent upon not having any other Traditional or Rollover IRAs laying around thanks to this buzzkill tax oddity called the pro rate rule—so if you fear you’re ~too rich~ to contribute, more Backdoor Roth IRA hot takes live here.

If you’re one of the few lucky Americans with income so high that you’re able to contribute the maximum to all of these accounts, you could potentially score:

• $23,500 tax-deferred or Roth dollars in the W-2 401(k)

• $70,000 tax-deferred or Roth dollars in the Solo 401(k)

• $7,000 Roth in the Roth IRA

*infomercial voice* But wait, there’s more! 

If your employer and plan provider allow for after-tax contributions to your W-2 401(k) (what’s known as the Mega Backdoor Roth IRA), you can fill your W-2 401(k) up to $70,000, too. Keep in mind that includes your employer’s matching contributions, so the realistic mix is likely $23,500 of your contributions, $5,000-$10,000ish in employer match, and the remaining $30,000ish in “after-tax” contributions that can be converted to Roth.

The reality? If you’ve got enough money coming in that you can sock away $70,000 in two different 401(k)s, the chances that you should be opting for Roth in either of those accounts are slim—your tax rate is likely extremely high. 

Other considerations for Combination #1

Since you can opt for any mix of Traditional or Roth in both 401(k)s, especially if you can’t fill either of them all the way up, it’s likely much simpler to just get your desired amount of Roth exposure in the 401(k)s instead of jockeying around with the Backdoor Roth IRA.

If you can fill both 401(k)s and prefer to keep all of it tax-deferred, then I think the Backdoor Roth IRA makes sense—but there’s no need to overcomplicate it. (“There’s no need to overcomplicate it,” she says, in an article that’s blatantly overcomplicated.)

Fantastic. That brings me to my next point about simplicity in Combination #2.

Combination #2: Employer-sponsored 401(k) or equivalent account + SEP IRA + Roth IRA, maybe

This path might be a hair less optimized, but potentially far simpler.

• The 401(k) is still the bedrock here. As a refresher, it gives you the ability to make Traditional or Roth contributions, regardless of how much money you make.

• The SEP IRA works a little differently than the Solo 401(k). The major selling point? It’s way easier to open. You don’t need an EIN number (i.e., an incorporated business) and there’s less paperwork. Most robo-advisors offer SEP IRAs, while only major incumbent brokerage firms offer Solo 401(k)s. There’s no such thing as a Roth SEP IRA, so you only have the ability to make pre-tax contributions. If you’re rolling in the dough, though, that shouldn’t be an issue; most high earners wouldn’t be opting for Roth over Traditional anyway, in my opinion. Here’s more about the differences and how to open both types of accounts, if you’re torn. (Technically speaking, you contribute post-tax money to a SEP IRA that you then claim as a tax deduction in April when you’re gettin’ freaky with TaxAct and a bottle of red.)

• The Roth IRA, but probably not. Remember our rules about the Roth IRA? Can’t contribute if your taxable income exceeds $165,000 single or $246,000 filing jointly? Well, that might make the Roth IRA obsolete for someone in this position, as someone who can afford to invest $50,000+/year is likely already above the income limit. “What about the Backdoor Roth IRA?” you say? If you’ve got a SEP IRA, that makes the Backdoor Roth IRA a tax quagmire. TL;DR: The likely outcome for Combination #2 is that you’ll only have your W-2 401(k) and a SEP IRA unless you’re under the Roth IRA income limit that allows you to go through the “front” door.

The same logic applies here: If you have enough money to contribute to multiple accounts but not enough to fill them all up, it’s likely simplest to get your Roth exposure in your 401(k) and not even mess with the Backdoor Roth IRA (assuming you’re over the income limit). 

Other considerations if you’re hard up for that Backdoor Roth IRA

Frustrated because you have a SEP IRA or Rollover IRA sitting around, but in your heart of hearts all you want to do is perform a Backdoor Roth IRA? (Once again, sexual innuendos abound.)

Good news! We may have a valid workaround for you.

You know how you can roll old IRAs and 401(k) into a new 401(k)? The Solo 401(k) works the same way. You can open a Solo 401(k) and roll your pre-tax IRA funds into that Solo 401(k). This means you won’t have any funds sitting around in Traditional/Rollover/SEP IRAs, and you’ll be in the clear for the pro rata rule! 

If you’re wondering whether you even need Roth, I do think some Roth funds are nice in retirement so you have diversity in tax planning (even if you’re in a high tax bracket while working). After all, the tax treatment on money contributed to a Roth IRA or money contributed to a taxable brokerage account is no different: You’re paying taxes upfront. The only difference? Dividend income in that taxable brokerage account is taxed every year moving forward and your capital gains are taxed when you sell, whereas the money in your Roth IRA is never taxed again.

One more thing…

If you’re reading an article about how to invest optimally when you have two sources of income and made it to this line, you’ve already won. Keep going.

I talked on the podcast a few months ago about how the obsession with financial independence in America is a cry for help; in that podcast, I discussed the way in which people are working less because work is getting more demoralizing. I still think that’s true. 

But demonizing working harder (rather than acknowledging that, for some, it really is the answer to earning more and progressing faster) misses the point: Some people need true economic intervention and higher wages (approximately 53 million of them). 

Others—who want to earn $200,000/year and live the high life—are probably better candidates for introducing a little elbow grease to the equation and making some savvy business decisions. 

This is your brain on Late Stage Capitalism.

Once you file your return, you’ll probably receive something called Form 1040 that outlines everything you reported (with other forms attached, depending on your situation). I like to save that as well, as sometimes they’ll ask you to report your “2024 AGI from line 11 on Form 1040” (as a wildly specific example) when filing in the future. 

Examples of What My Manual Tracking Has Looked Like Over the Years

Business revenue

I categorized my business income into different sections and then tracked how much revenue each sponsor, affiliate, or product generates (I redacted names for #confidentiality purposes in this screenshot).

I’ll usually tally up the entire year of payments from that source in the “1099 EXPECTED TOTALS” column and then cross them off as I receive the forms in the mail.

Solo 401(k), SEP IRA, or other self-managed tax-advantaged accounts

Same with my Solo 401(k), noted above—as you can see, I contributed $70,813.30 to tax-advantaged accounts in 2021, and roughly $46,000 of it came from the “Solo 401(k)” row, so I knew exactly what to claim as a contribution so it would match whatever Vanguard sends to my IRS Daddy. (I think I miscalculated my contributions because I wasn’t taking my various business deductions into account, so I may need to go back and remove some…we’ll see.)

Taxable brokerage accounts that generate 1099-DIVs

And since we filing jointly, here’s an example from years’ past of our breakdown of taxable investing accounts. I knew I needed to submit 3 1099-DIVs for me and 3 1099-DIVs for Thomas (our joint account was opened in 2022 so nothing to report, and oddly, Thomas’s cryptocurrency had $0.00s across the board for what we needed to report, so…prayers up to the audit gods that nothing is amiss there). I hid the brokerage account names for confidentiality purposes, but knowing where each account is located helps with the demented IRS scavenger hunt of finding all the correct forms.

The Wealth Planner separates “Tax-Advantaged” investing from “Taxable” investing, so you should be able to quickly see (if you fill it out) which accounts you’ll need to grab 1099-DIVs for.

Business expenses

And finally, here’s the breakdown from 2022 of business expenses. The rest of this stuff has been charged throughout the year, so I have receipts to back up my expenses: $3,346.02. I ended up being able to deduct about $3,500 of our rent paid this year as well, thanks to the calculation that the TaxAct software did for me (I had to enter total rent paid and the percentage of the home that I use exclusively for business purposes; it was pretty easy).

How our Return Ended Up Shaking Out

TaxAct provides this nifty little summary at the end (it took me a few months to aggregate everything and another day or two to double-check all the forms; it was certainly not an easy task this year).

We reported $390,422 in 2021 income (so close to $400,000—so close) and “adjusted” down $57,864; this was in the form of deductions like Solo 401(k) contributions and other deductions (moving expenses for an Armed Forces relocation, for example). Your contributions to your employer-sponsored retirement account(s) are already removed from that top line number, so I suppose if you factor those in (about $25,000 between us), we were over $400,000—just another feather in the cap of pre-tax investing, no?

That gets us down to $332,558, from which we were able to deduct the standard deduction ($25,100 that year; 90% of Americans take the standard deduction, and it’s likely you do, too) and the QBI deduction for my business ($29,433) to create our taxable income of $278,025—more than $100,000 less than what we actually earned. 

Again, may I shout it from the rooftops? This is almost entirely due to the power of pre-tax investing. 

Now for the not-fun part:

Since we only paid $22,745 in taxes throughout the year, we owe—womp womp—$36,640 this year. Still, we’d owe a whole lot more had we not contributed to our pre-tax accounts:

• $5,580 to Thomas’s military retirement TSP

• $19,500 to my 401(k)

• $46,000 to my Solo 401(k)

• $2,700 to my HSA

…$73,780. Had we just claimed all of that as income and not contributed it to pre-tax accounts, we would’ve owed closer to $62,000 this year, not $36,000. Yikes.

Conclusions

All in all, I’m grateful that we owe money because it’s a sign of a great year. It’s a little painful to fork it all over at once, but that’s another key thing: Had I been filing quarterly taxes and setting aside 25%-30% of my business income as I went, I could’ve avoided this all-at-once tax bomb.

And if I do get audited, well…#content.

In life, every upside has a downside.

When it comes to earning more money from side hustles, the downside is that you’re now on the hook to figure out how to pay the taxes on that income. I’m still not sure why the federal government, who 100% knows how much you owe, can’t just tell you – but I guess we’ll keep playing their little demented guessing game until the TurboTax lobbyists get thrown out.

Why determining your side hustle tax rate can be difficult

Of course, owing more in taxes means that you’re making more money – so who’s complaining? Hopefully nobody.

But when you’re a full-time self-employed person, it’s a little bit easier to calculate how much you’ll owe – because all of your income is 1099, so you’re calculating tax on one big pot of un-taxed money.

When you have a full-time job and side hustle(s), things get a little hairier.

I’ll never forget the regret I felt for rushing through my W4 form for my fitness instructor gig when tax season rolled around.

I didn’t tell the W4 that I had any other income, so they were withholding taxes on my cycle instructor paycheck as if I only made $12,000 per year (my income from teaching).

What a fun surprise it was to learn – on April 14, 2020 – that, “Oh, it turns out the other $80,000 you earned this year is going to make you owe way more on that cycle income!” Bada bing, bada boom – $3,000 tax bill.

Fortunately, I had the money available to pay it, but I know not everyone would’ve been in a position to pay a multi-thousand dollar tax bill on short notice. It’s probably smart to have a system in place for figuring out, with some degree of accuracy, how much you’re going to owe.

The other method, of course, is setting aside a flat figure – like 30% – but I’ve found people usually set aside too much and then suffer the opportunity cost of not investing that income (or doing something else with it) all year long as it sits there collecting dust for the IRS.

(This is your friendly reminder to fill out W4s accurately for jobs that do withhold taxes to avoid unwelcome surprises.)

Now, my tax situation is wonky as hell. I have two W2 incomes (meaning paychecks from an employer who withholds taxes) and one source of 1099 income (in other words, income that isn’t taxed – it’s on me to pay the taxes).

The 1099 income is also under my LLC, which means it’s self-employment income and subject to an additional 15.3% self-employment tax.

How your self-employment income tax is determined

The amount of tax you pay is determined by your total taxable income, not each source individually

Let’s make that real with an example:

Let’s say I make…

$20,000 from one W2 employer (given to me post-tax)

$100,000 from another W2 employer (given to me post-tax)

$50,000 in 1099 income (untaxed)

That’s a total income of $170,000, which – after the standard deduction – is a taxable income of $157,450.

But if I just looked at each chunk independently (and filled out W4s as such), I’d be underpaying taxes all year and surprised at the end of the year with a big tax bill when the government realized, “Wait a second, we’ve been taxing this girl’s $20,000 income as if it were her only income,” and added my $50,000 of self-employment income to the totals.

TL;DR: You have to self-withhold taxes from your side hustle income by taking into account the rest of your income, too – not treating it as its own individual chunk of money.

That $50,000 in self-employment income isn’t taxed like a $50,000 salary with no other income – it’s taxed as part of a $170,000 income.

This can be really, really difficult to calculate manually throughout the year (of course, the tax software will do it for you when you go to file, but by then, it’s too late – you want to know throughout the year what percentage of that side hustle income needs to be set aside for taxes, not a week before it’s due).

Things get even more complicated when you start adding in deductible business expenses – because as a business owner with 1099 income, you can deduct your expenses if they’re for your business (e.g., I deducted my LLC filing, my website hosting, and more, which means my taxable income is reduced by that amount).

Instead of trying to build a tool to do it, I went looking for a (free) tool that would automatically sync to my accounts and help perform some of these calculations as I go.

Free app that connects to your accounts and calculates your taxes owed for you: Lunafi

The app that I’ve been trying is called Lunafi, and it was pretty simple to set up.

First, I linked my checking account. I figured that would be enough (as I only have one central depository for all my income, W2 or 1099), but realized I needed to link my credit cards as well since that’s where I put my business expenses (if you don’t have any business expenses, I think you could just link your checking account).

I don’t have a business credit card or checking account (though it’s probably time I get those), but if I did, I would’ve linked those instead of my personal accounts.

The point is, you have to link any account that has income or expenses related to your 1099 gig so it can properly total your income and expenses related to the business. The cool thing is that you can classify any income from any source as 1099, so even if you’re getting paid via Venmo, you can accurately report that income and pay taxes on it (assuming you want to).

Then, I had to answer some questions about my W2 income – and keep in mind, it’s on you to fill out your W4 forms correctly for your W2 income so the correct amount of tax is withheld from your paychecks, but the IRS actually has fairly helpful calculators for that. Shocking, I know.

There were 9 questions about how much you make from W2 income each year (which is, hopefully, something you can project rather easily by filling in your salary and bonuses), if you work from home (to deduct the “home office” portion of your rent), your health insurance situation, pre-tax contributions to accounts like 401(k)s and SEP IRAs, and more.

It was nothing too wild, but I did find myself guessing on some of it – basically, they want you to project your W2 income and pre-tax investment account contributions for the year to help the algorithm determine how to tax the rest of the income that comes in. I feel like it probably won’t be perfect, but it’ll be a lot closer than calculations I would’ve done on my own (or, the more likely scenario, ignoring it completely).

Plus, it’s free, so there’s really no downside.

How to use Lunafi in an ongoing way

From there, things are pretty damn simple. All of your transactions get floated into the app, and you just classify whether it was W2 income or 1099 income. You can create rules so it knows certain transaction names are tied to one or the other, which helps to automate it some.

Then, it shows you – right on the home screen – your total income for the year and estimated taxes owed.

It doesn’t file quarterly taxes for you (that’s also something I’m still in the process of learning more about), but it’ll tell you how much you likely owe on the income.

I found this graphic on their site that explains the steps pretty well:

I’ve also been using the feature that allows you to assign certain income to a “client” so I can see, at a glance, how my sources of income stack up against one another. This is fascinating, especially for someone with multiple sources of income or clients.

(I can totally see a situation wherein someone starts tracking income by client in this app and then notices their one pain-in-the-ass client represents such a small amount of their income that it’s not even worth it. The visualizations are helpful.)

And as income flows in, it’ll tell you the estimated income tax on each individual payment, too. So while I may see that I owe $3,000 so far for Q1 based on my projected W2 income for the year and 1099 income earned so far, I can see one client’s payment generated about $150 in income tax. Kinda cool.

How often I’m using Lunafi to keep tabs on my 1099 tax

This isn’t something I interact with on a daily basis. I’m not going in there and closely monitoring how much I owe in taxes each afternoon. But I do check it every couple weeks, make sure the income is being classified properly, and deduct any business expenses that have come through.

I keep an eye on the total estimated tax owed just to make sure that I’ve got a good buffer in checking and savings in case I do decide to be a law-abiding citizen and start paying quarterly taxes (though I think I’m going to risk the penalty for one more year to see what happens, in the name of science – at least until I know more).

I’m just now starting to get a little more serious about creating reports for my business to understand the top sources of income, how I’m spending my time, etc., so I think the reporting feature will come in handy when I start generating monthly reports like a real business bitch.

Only time (and tax season) will tell how well it prepares me, but for a free tool that automates the calculations and takes out the guesswork for me, I’m pretty pumped.

If you have side hustle income or consider yourself a “freelancer,” give it a spin.

I asked Lunafi to provide me with a referral link to share and if they’d be willing to sponsor this post about their product, and they agreed.

You may also like these posts about taxes…

One of the most interesting things about blogging about personal finance (and, by extension, creating an Instagram presence that just screams, “Send me your deepest, darkest fears about investing!”) is that the way questions are phrased reveals a lot about the deep misunderstanding most of us have about how investing actually works.

For example, a question I receive more than I’d like to: “Should I invest in my 401(k) or index funds?”

There’s absolutely no shame in not understanding—after all, when would you have learned this stuff unless you took an active interest?

But 401(k)s and index funds are not an either/or. That’s like asking, “Should I eat fruit or strawberries?”

The strawberries are INSIDE the “fruit” category. I recently posted a picture that explains how all these terms are related:

The good news is that people are asking about index funds, which are, in my opinion, one of the absolute best ways for any individual investor to do really well in the stock market.

Jack Bogle, the founder of Vanguard, invented the index fund in 1975 and pretty much immediately pissed off and amused every big wig on Wall Street.

The premise of an index fund—that you aren’t trying to purchase individual stocks, but instead buying a fund that tracks an index—was a wild idea at the time. At first, people ridiculed Jack for suggesting investors should stop looking for the needle in the haystack and instead buy the entire haystack. How could that possibly compete against making educated guesses at which stocks would perform best? As you can probably guess, his critics promptly shut the hell up after a few years of his index funds crushing.

Why is it so hard to pick individual stocks? It has a lot to do with the fact that our perception of successful companies is very relative and skewed to our own present-day experience and biases.

Only one of the original 30 companies listed on the Dow Jones Industrial Average is still around, General Electric. Companies, industries, and the world around them changes—and usually, those changes are gradual, complex, and not obviously correlated to one another.

Once a company becomes an obvious “winner” as defined by its stature in the market, most of its explosive growth has already happened: Someone who purchased $1,000 worth of Apple stock in the 1990s when all the pundits were claiming it was a loser that would never get asked to prom saw some serious returns.

But someone who buys Apple today? Apple already popped off. The ugly duckling already had its glow-up. Nobody’s laughing at you if you buy Apple now. Sure, you’ll see growth, but will it compare to the get-rich-quick windfall that nerds in the 90s predicted when Wall Street was scoffing? Unlikely. Apple was a shooting star.

…and basing your investment strategy on your ability to seek out shooting stars is probably going to net you majority losses. Things change.

“Consider that in the 1960s the U.S. government was seriously considering (it never happened) the forced breakup of General Motors. GM was deemed so dominant and powerful that no other car company could compete. This is the same GM that survives today only by the grace of a huge bailout by that same government. On the other hand, back in the 1990s the smart money was betting Apple might not survive. As of this writing, it is the single largest U.S. company as measured by market capitalization. Today’s stars are tomorrow’s wrecks. Today’s fallen are tomorrow’s exciting turnarounds,” writes J.L. Collins in his 2016 book, The Simple Path to Wealth.

Why is it so hard for some of us to accept that picking individual stocks can ultimately net losses over time, or underperform index investing as a whole? Because we’re prideful and stupid. Just kidding (about the second part). The people I see struggle with this the most are the really smart ones: It’s hard to wrap your big brain around the fact that you’ll do better by doing nothing. It flies in the face of the way we’re taught to approach every other aspect of our lives – but investing isn’t like the other aspects of your life.

Being a successful investor comes down to a few counterintuitive principles: Being okay with boredom 90% of the time (slow growth over time) and terror 10% of the time (March 2020 COVID plummet), coupled with extreme patience.

Index investing isn’t exciting—it’s generally stable.

So what’s investing anyway?

In its simplest form, investing means you’re buying a little piece of a company. You’re not just buying a piece of paper or a number on a screen; you’re not dumping your money into an account where you’ll earn a guaranteed interest rate (another weirdly common misconception). When you invest, you’re becoming a part owner of a company—or hundreds, or thousands of them, depending on what you buy—and as that company makes money, so do you. That’s really all there is to it.

If that company loses money, so do you. This is the nauseating downside to the Apple narrative: It’s the reason individual stock investing is a double-edged sword. There are other companies that have gone from market darling to out of business just as quickly, turning whatever amount you invested into a gut-wrenching $0.

That’s why index funds like those that track the S&P 500 can be so great: Because you own pieces across the largest 500 companies in the United States, you own an index that automatically filters out certain companies, without you doing a damn thing.

Say you own an S&P 500 index fund (like VFINX, the Vanguard S&P 500 index fund, or the ETF version, VOO), you can own pieces of:

• Apple Inc. (AAPL)

• Microsoft Corp. (MSFT)

• Amazon.com Inc. ( AMZN)

• Facebook Inc. (FB)

• Tesla Inc. (TSLA)

• Alphabet Inc. Class A Shares (GOOGL)

• Alphabet Inc. Class C Shares (GOOG)

• Berkshire Hathaway Inc. (BRK.B)

And about 490 more. As companies grow and become successful, they can automatically get added to that index. As they start to shit the bed and shrink, they can be dropped— automatically.

Some financial gurus, like Paul Merriman, take the opposite approach and promote small-cap value index funds (in other words, suggest owning index funds that comprise hundreds of the smallest companies), the logic being that every Apple, Tesla, and Microsoft once started out as a fledgling baby before they became breakout stars.

If you wait until they crack the top 500, it’s likely that a lot of the explosive growth has already happened—thus the argument for owning the #SmallBoiz too, knowing the risk that most of them will fizzle and die—but if you own one or two future shooting stars, it could create a lot of growth.

Other approaches

Of course, another approach is buying the entire market in a fund like VTSAX (ETF: VTI), the Vanguard Total Stock Market fund. When you own the entire market, you’re buying the entire haystack—not just a subset of it. The tricky thing is that big companies are given preference in index funds, by nature of the fact that they’re bigger.

And while we won’t get into a deep dive today on an optimal way to structure your portfolio (hint: this is hotly contested and there are many competing schools of thought, as you may be able to tell already), it’s important to know that index funds require you to abandon your get-rich-quick fantasies and gambling tendencies and instead subscribe to the get-rich-slowly-and-steady plan.

“Great, I’m in. But what’s the difference between an index fund and an ETF?”

Ah, yes, the other great confusing topic with no great answer.

Investing is always evolving. Remember how the index fund was invented in the 70s? The ETF was invented in the 90s, and it stands for “exchange-traded fund.”

It basically just means it’s an index fund that, instead of trading once per day, can trade throughout the day as if it were an individual stock. You can get index funds (or ETFs) that track all sorts of indices: the tech sector, small companies, bonds, etc.

What does that mean for us? Nothing, really, except for the fact that they usually have slightly lower expense ratios (read: costs) and lower barriers to entry.

Where to buy index funds and ETFs

You can buy ETFs in any investment account, and it’s really easy to open one. Your 401(k). Your Roth IRA. Your taxable investing account. Your boyfriend’s sister’s 401(k)! These puppies are everywhere, and you’d probably benefit from an audit of what you’re invested in in these various accounts. Happy index investing!

Being self-employed has, candidly, been a meaningful goal of mine since about six months into working full-time.

On my ideal self-employed day, I rise at 7 a.m. (instead of my current 5:30 a.m. wake-up call) and pad around the kitchen in an impossibly chic matching silk pajama set. After an hour-long morning routine that consists of matcha lattes, transcendental meditation, and a leisurely stroll around the block, I finally sit down at my Pinterest desk to put in a few light hours of reading and writing before retiring to the den for my afternoon nap.

Of course, this fantasy produces a ridiculous amount of money, my hair is shinier, my teeth are whiter, and I am a happier, less stressed version of me.

For those of you who are self-employed, I’m sure you’re having a hard time reading through your twitching left eye and uncontrollable laughter. [Update from future, self-employed Katie: LOL.]

Two obvious gripes are most common among the self-employed people I talk to: Healthcare and access to retirement accounts.

While I don’t have any answers for you on the healthcare front, I actually think the self-employed have a distinct advantage when it comes to tax-advantaged retirement investing.

While the corporate robots (read: me) get hot and bothered about a dollar‑for‑dollar match and the ability to contribute up to $24,500 per year (2026) to our 401(k)s, self‑employed folks also have powerful ways to contribute to pre‑tax investment accounts. 

Am I talking about the Roth IRA?

No! Of course not. At $7,500 per year, the Roth IRA is a great (post-tax) vehicle for both W-2 employees and the self-employed (you can open one in the straightforward way so long as you’re under the income limit of $165,000 per year; if you’re not, I’ve got a frenzied guide to contributing to a backdoor Roth IRA here).

Takeaways, upfront:

I still think you should read the post because it gets into the granular tax details, but the main takeaway I had was this, all the standard “not financial advice” disclaimers notwithstanding:

• If you’re truly self-employed (no income from W-2 jobs or access to employer-sponsored plans), you could be better off with the Solo 401(k).
• If you’re self-employed AND have a “regular” full-time job with a 401(k) (in other words, a side hustler), the SEP IRA might be an option for you to look into.

Introducing: The SEP IRA and Solo 401(k)

I honestly felt like the personal finance world had been holding out on me when I found out about these magnificent accounts. Let’s focus on the SEP IRA first, because it’s (generally) easier to set up.

SEP IRAs

The maximum you can contribute to a SEP IRA is—are you ready for this? I hope you’re sitting down—$72,000 per year in 2026.

The catch is that, in order to contribute the full $72,000, it must represent no more than (what works out to roughly) 25% of your net self-employment income. In other words, in order to contribute the full $72,000, you’d have to make roughly $288,000 in net self-employment income.

For example, if you net $100,000 per year in 1099 income, the most you can contribute is around $25,000 (25%).

Still, this is a hell of a lot better than the $24,500 employee contribution limit in a typical employer-provided 401(k).

Technically, a SEP IRA has an “employer-only contribution” setup, but that’s one of the perks of working for yourself. You are both the employer and the employee. You’re contributing 25% of your net 1099 income as the “employer” to yourself as the “employee.” Weird, right?

The extra-dope thing about that $72,000 (if you’re a high-roller earning $288,000 per year and eligible to contribute the full amount under IRS rules) is that it’s generally tax-deductible, which means you won’t pay taxes on it this year. With taxable income around $288,000, you’d likely be in the 32% marginal federal tax bracket, which means a $72,000 contribution to a SEP IRA could generate approximately $23,040 in federal tax savings—that is, $23,040 in taxes you may no longer owe this year, because you’re reducing your current taxable income. and deferring taxation within your SEP IRA.

Increíble! To really drive the point home, you could take that $23,040 you’re saving and invest it in a taxable investing account to double your fun.

You’ve got until the filing deadline to make your contributions, which means (in a normal year) you’ll be contributing from April 15 to April 15 (i.e., tax season to tax season).

This means, if you’re reading this in March of 2026 and you haven’t filed your taxes yet, you can open a SEP IRA, make contributions, and deduct it before you file to save yourself some tax dollars for the 2025 #TaxSzn.

One weird tax caveat that I don’t all-the-way-understand, but mostly get it (sue me!): Technically, it’s not quite as baller as it sounds, because you’ve got to pay your self-employment taxes on your net income (profits – expenses) before you can calculate your 25% contribution. That is: It’s not 25% of your gross self-employment income (the money on those #checks), but closer to 20% of your net income less half your self-employment taxes. plays tiny violin and begrudgingly hands back some of my Stripe funds from spreadsheet sales

What if you’re a big side hustler and you’ve got a 401(k) through your employer and a side business?

First of all, I’d love for you to flip your hair as I congratulate you on being the Ultimate Millennial Hustle Culture Workhorse! We love to see it. From one ambition trauma goblin to another, I salute you (lots of weird military references in this post; I’m sorry).

And beyond all the hair-flipping, you’re in luck!

You can still open and contribute to a SEP IRA even if you’ve already got an employer-sponsored 401(k) through traditional, full-time work.

The same rules more or less apply; you’re the employer in the SEP IRA situation, so you’re making employer contributions to yourself as the employee.

You could theoretically max out your 401(k) with your regular salary at $24,500 per year, then turn to your SEP IRA and contribute 20% of your net self-employment income and defer that as well (defer = make it tax-deductible and reduce your taxable income).

But don’t take it from me—straight from the IRS in this screenshot:

How to open your SEP IRA

Well, you know what I’m going to say: Betterment offers one. They’ll walk you through the process, including providing the IRS form you need to fill out and keep for your records in order to be in the clear.

Paid client. Views may not be representative. See App Store & Google Play reviews. Investing involves risk. Performance not guaranteed. Learn more.

A little fuzzy on how much, exactly, you can contribute? The IRS provides this “calculator” (you can probably guess why I’m using quotation marks if you’ve ever done your taxes before) that’ll help you figure it out down to the penny.

I’ll be honest: I tried to follow their instructions, and I found it pretty confusing. I’m a big fan of the 80/20 rule; that is, 20% of your effort drives 80% of the results. Put another way: Get the most juice for the least squeeze.

Rather than trying to figure out the exact amount I could contribute, I’d probably play it safe and contribute around 20% of my net pay and call it a day. (If you aren’t as comfortable with estimates like I am, please, for the love of God, hire an accountant—something I finally did in 2026 after, you guessed it, becoming self-employed.)

Legally, you don’t need an EIN to open a SEP IRA, but I’ve read that most brokerage firms require it (more on EINs below, because they are required for Solo 401(k)s).

An important note on SEP IRAs and Backdoor Roth IRAs

If you currently perform a Backdoor Roth IRA (if you don’t know what this is, don’t worry; that means this watch-out probably doesn’t apply to you), you’ll want to think carefully about opening and funding a SEP IRA. A SEP IRA is, in the eyes of the IRS, a Traditional IRA—which means pre-tax funds sitting inside your SEP IRA may result in part of your Roth conversion being taxable (the “pro rata” rule).

For that reason, if you’re committed to the Backdoor Roth IRA, it could be safer to go with the Solo 401(k). 

So where does the Solo 401(k) come in?

Solo 401(k)s work a little bit differently, and are definitely better for truly self-employed people than “traditionally” employed people with side hustles.

With a Solo 401(k), you make contributions as an employee and an employer (vs. just as the employer, as in the SEP IRA) for a total contribution of $72,000 (just like the SEP IRA) for 2026.

You can contribute (please read this in a robot voice) up to $24,500 as the employee, and then an additional employer contribution of up to 25% of your net income, less half the self-employment taxes and your $24,500 contribution (that’s right—you have to subtract the $24,500 from your net income in addition to the taxes; they really get you both ways).

Careful if you’re already contributing the maximum to your 401(k) plan at work

The hairy thing for side hustlers with the Solo 401(k) is that 401(k) contribution limits are determined per person, not per plan—which means if you’re already contributing $24,500 to your employer 401(k), you can’t also contribute $24,500 to your Solo 401(k) as an employee (this is known as the “elective deferral”).

They make more sense for self-employed with only self-employment income, since your $24,500 contribution is irrespective of your total net income less all the tax mumbo jumbo (in other words, it doesn’t matter how much you make; as long as you make more than $24,500, you can contribute $24,500). Compare that to the SEP IRA, where in order to contribute $24,500, you’d have to make more than around $98,000 in net business income.

So your employee contributions can go up to $24,500, but your “employer” contributions can still equal that 25% chunk of what’s left—which means if you can manage to contribute more than $24,500 of your income, you can (and should) up to 20% of the “net income minus half self-employment taxes minus $24,500 contribution.”

Let’s do an example, because I can feel your eyes rolling into the back of your head

The Solo 401(k) can make more sense for the truly self-employed unless said person earns more than around $288,000 in net self-employment income per year. Here’s why:

• Because the SEP IRA is structured to only allow “employer” (read: you) contributions of up to 25% of your net income, in order to contribute the maximum allowable ($72,000 per year), you’d need to net 4x that (roughly, in order for 25% of your net business income to equal $72,000), remember? That’s $288,000.
• Since the Solo 401(k) allows you to contribute $24,500 as the “employee” and 25% of whatever’s left as the employer (also you!), you have the opportunity to double-dip.
  • Consider an example of someone who makes $150,000 in net business income. (All numbers here are approximate for the sake of an example; again, please go inquire with your CPA for the correct totals!)
  • 25% of $150,000 is $37,500. That’s pretty good, right? That’d be roughly their allowable contribution in a SEP IRA.
  • But what if they chose a Solo 401(k)? Then, they can contribute their initial employee contribution of $24,500, and then 25% of whatever’s left.
    • $150,000 – $24,500 = $125,500, and 25% of $125,500 (or their allowed “employer match” as their own employer) is $31,375.
    • $24,500 (their “employee” contribution) + $31,375 (their “employer” contribution) = $55,875.
  • The SEP IRA would only allow them to contribute $37,500, whereas the Solo 401(k) allowed $55,875, simply because of the way the account contributions are structured.

The only reason the SEP IRA might make more sense at a net business income of $288,000 or above is because 25% of that net income is $72,000 maximum. In pretty much every other case, the Solo 401(k) will allow for more money to be contributed.

Now, that being said, the Solo 401(k)s:

1. Do have higher administrative burdens from a paperwork standpoint
2. Are really only tenable for people who are fully self-employed, as your employer 401(k) will make it function just like a SEP IRA

Other fun tax good-to-knows:

• You need an EIN to open a Solo 401(k), which is the number you get when you start a business and register it legally.
• While your SEP IRA contributions run April to April, Solo 401(k) employee contributions have to be made by December 31 (in other words, they run on a calendar-year basis), but employer contributions can be made up until the tax filing deadline of April 15. 

Here’s the good news: As of 2025, Betterment began offering a Solo 401(k). This is a huge development. I finally decided it was time to make the switch and opened my Betterment Solo 401(k) last month.

The process was pretty easy. I originally had to schedule a call to walk through it with a Betterment representative, but because they were able to confirm all my business details after I scheduled my onboarding, I was able to verify all the details over email if that was my preference (you can also keep the call if that makes you more comfortable). Betterment handles the paperwork. 

Let’s return to our order of operations

You may be wondering now how to incorporate this new blitzkrieg of information into everything you already know. Let’s create a funnel, shall we? This is an order you could consider depending on which investment accounts you have access to and your income. If I list anything that you don’t have (read: can’t have), just skip to the next thing. 

1. Employer-sponsored 401(k) [full-time corporate employee with a side hustle] or Solo 401(k) [full-time self-employed] up to $24,500
2. Roth IRA [everyone!] up to $7,500 per year [can do Backdoor if you need to, but remember that Backdoor Roth IRA folks will want to use a Solo 401(k) rather than a SEP IRA to avoid the pro rata rule]
3. SEP IRA [full-time corporate employee with a side hustle] up to ~20% of your net side hustle income, less half self-employment taxes up to $72,000 per year, or Solo 401(k)’s “employer match” feature [if you’re self-employed and knocked out the “employee” contribution in step 1]
4. Taxable investing account [regular ole’ investing with no fancy stipulations or limits, but the highest tax burdens, called “General Investing” in Betterment]

Easy, right? Just go out and earn hundreds of thousands of dollars and master tax law, and you’re good!

(Just kidding, but we are all in this together, figuring it out one step at a time.)

Betterment does not provide tax advice.