By Dr. James M. Dahle, WCI Founder
Just because you are self-employed doesn't mean you don't have options to save for retirement. Here's a rundown of the best retirement options for self-employed workers.
Retirement Accounts for the Self-Employed
There are many advantages to being self-employed when it comes to saving for retirement. As an independent contractor (i.e., paid on a 1099 instead of a W-2), you are considered to be running your own business. Just like your employer gets to pick the benefits it offers, you now get to choose (and pay for) your own benefits. While the self-employed miss out on a 401(k) match from an employer, you are also no longer limited by the employer’s contribution limits, plan fees, or often poor investment options.
Retirement Options for Self-Employed
- Individual 401(k)
- SEP-IRA
- Backdoor Roth IRA
- HSA
- Defined Benefit/Cash Balance Plan
- Taxable Brokerage Account
Independent Contractor 401(k)
The mainstay of retirement saving for the self-employed should be an individual 401(k), sometimes called a solo 401(k). In 2022, these plans allow you to make a $20,500 “employee” contribution ($27,000 if older than age 50) and then make “employer” contributions of 20% of your net income up to the plan contribution limit of $61,000.
While you only get one employee contribution no matter how many jobs or 401(k)s you have, the $61,000 limit is a per-plan limit. That means if you have an employee job with a 401(k) and do some work as an independent contractor, you can still open an individual 401(k) and just contribute the employer contribution to it.
Where Can I Open a Solo 401(k) Account?
Solid individual 401(k) plans can be easily opened at any of the large mutual fund or brokerage companies such as Vanguard, Fidelity, Charles Schwab, eTrade, or TD Ameritrade. While all of these plans are good plans with diversified, low-cost investments available, some plans offer features that others do not.
How to Set Up a Solo 401(k) and What Plan Features Should You Look For?
Be sure the individual 401(k) plan you choose has the features that are important to you, such as Roth contributions, IRA rollovers, or 401(k) loans. For example, some might not offer a Roth option while others do. If a 401(k) loan is important to you, Fidelity, Schwab, and Vanguard don't allow them with their plans, but it is an option with eTrade.
You will also need to get an Employee Identification Number from the IRS to open an individual 401(k), but this is free and only takes a few minutes online. You do not need to form an LLC or corporation to use an individual 401(k). By virtue of receiving a 1099, you are automatically a sole proprietor, and that is enough to start a plan.
If you are interested in investing in real estate or other non-publicly traded investments, consider a self-directed 401(k).
Self-Employed SEP-IRA
Some doctors, and even their accountants, consider using the slightly simpler SEP IRA instead, which has the same $61,000 total contribution limit. However, thanks to the employee contribution feature of an individual 401(k), you can hit the maximum contribution of $61,000 with a much lower income. In addition, using the i401(k) instead of a SEP IRA allows you to do a Backdoor Roth IRA since the balance of a SEP IRA is included in the required pro-rata calculation (explained below). Talance of an i401(k) is not.
Backdoor Roth IRA
Whether you are employed or self-employed, you can also contribute to a personal Backdoor (indirect) Roth IRA and—if you're married with sufficient income—a spousal Backdoor Roth IRA. These became permitted in 2010 when Congress began allowing high earners to do Roth conversions. Instead of a direct Roth IRA contribution, you first contribute to a traditional IRA, which is not deductible due to your high income, and then move that money to a Roth IRA.
There are still plenty of great retirement savings options if you are riding solo.
Since you never received a deduction, there is no tax cost for the conversion, and the end effect is the same as if you had contributed directly to a Roth IRA. Annual Roth IRA contribution limits for 2022 are $6,000 if younger than age 50 and $7,000 if older than age 50.
Be aware that due to the pro-rata rule, the conversion is only tax-free if you have no balance in a SEP IRA, a SIMPLE IRA, or a traditional IRA on Dec. 31 of the year of the conversion. If you do have one of those accounts, you may wish to roll it into a 401(k), such as your new individual 401(k), to facilitate future Backdoor Roth IRAs.
Like with a self-directed, individual 401(k), you can also have a self-directed Roth IRA and invest in real estate or similar private investments. Just keep in mind that if your investment is leveraged, you will be subject to Unrelated Business Income Tax in a self-directed IRA (but not a self-directed 401(k)).
Health Savings Account (HSA)
A health savings account (HSA) can also function as a stealth IRA, and it's an excellent account to use for retirement savings. Not only does it give you an upfront tax break and tax-protected growth like a 401(k), it also provides for tax-free withdrawals if the money is used for healthcare. This makes it the most tax-advantaged account available to the investor. These funds can be invested in mutual funds like a typical retirement account. The contribution limit for 2022 is $3,650 for individuals and $7,300 for families. If you end up not needing it for healthcare, you can withdraw the money penalty-free after age 65. However, you would need to pay taxes on that withdrawal, just like a 401(k).
Defined Benefit/Cash Balance Plan for Individual Contractors
Another option for independent contractors, although more rarely used, is a personal defined benefit/cash balance plan. This retirement account is best thought of as an extra IRA masquerading as a pension. It has higher expenses than an individual 401(k) due to a requirement for annual actuarial calculations, and it typically is not invested as aggressively. However, the contribution limits can be quite high, particularly for physicians in their 50s or 60s. It is an option worth exploring for someone interested in saving large amounts for retirement.
Taxable Brokerage Account
Investing in a nonqualified, taxable brokerage or mutual fund account for retirement is also an option. While the tax and asset protection benefits are much more limited, the additional flexibility can be a useful feature. Alternative investments, such as real estate, are also much easier to invest in outside of retirement accounts, and equity real estate can provide income that is tax-free—at least for a few years—thanks to depreciation.
Self-Employed Retirement Savings Options Summary
As you can see, an independent contractor has plenty of excellent options to use for retirement savings. While the main pillar should be an individual 401(k), remember that a Roth IRA, HSA, cash balance plan, and taxable account provides additional options.
Are you self-employed? Which retirement accounts have you used to save for retirement? Comment below!
This is the first year that I’ll be both a W-2 employee at my main gig and a 1099 employee from my side hustles. This is a great overview for the latter.
The topic of how much I can fill up in a solo401K used to be confusing to me because I own a 403B (not a 401K), but now understand the implications, which is that the government views a 403B a little differently than a 401K in that I am considered to “own” my 403B contribution and, therefore, cannot contribute the full $55,000 into a solo401K (only $36,500 as opposed to the full $55,000 if I had a 401K for m W-2 work instead). I still get to use 20% of my side hustle income to fill up this $36,500. So, that is nice to have that additional option, though I am going to wait until my side hustles earn at least $10,000 to start doing this.
I didn’t know as much about the defined contribution/cash balance plan. I’ll have to look more into that. Thanks for mentioning it.
TPP
To be clear for my understanding given your comment: I have a 403b at my W2 job, to which I fund the $18.5K employee contribution and get matched up to the 55K total by the employer.
I have a 1099 side hustle where I make about $40K/year. But my understanding is I can’t open a solo401k because I hit that $55K limit at my W2 job, even if I was just doing employer contributions in a solo401k associated with the 1099 side hustle. Am I wrong?
Yes. You’re wrong. The $55K limit is per unrelated employer. You are the employer for the 1099 job. Your employer is the employer for the W-2 job. Two unrelated employers. Two $55K limits.
Thanks – first time I’ve enjoyed being wrong in awhile.
I was wrong on this one once. Corrected by Mike Piper. I was very happy to be wrong too, and a lot richer.
My wife is about to start a 1099 gig next week. She will likely make less than 18k for the rest of the year. Is it possible to put all her earned income into an i401k so we can avoid paying so much in taxes?
Try this calculator
https://sepira.com/calculator.html
Yes.
The SEP-IRA has worked well for me. I agree with those arguments for the Solo 401K though. In my case, I didn’t need to put a lot in and I convert it all to Roth anyway (or you could do the pro rata calculation) so the simpler, easier SEP-IRA works. We should all know about these options and figure what works best for us.
In some cases, they’re basically equivalent as far as contribution amount and if you don’t care about the Backdoor Roth IRA (or plan to convert the SEP completely each year), might as well do the SEP-IRA since it is slightly less hassle.
Does the $5,500 I invest and convert to a backdoor Roth IRA contribute to my $55,000?
No. The $5,500 IRA contribution has no effect on the $55,000 401k contribution.
No. Separate limits.
What if I receive both a 1099 AND a W2? I’m a physician with a considerable side hustle. Can I contribute to both my employer 401k and an individual account?
Yes. https://www.whitecoatinvestor.com/multiple-401k-rules/
So let’s say that I (hypothetically, of course) have $250k in a SEP IRA at Vanguard from my 1099 job, another $75k in a traditional IRA also at Vanguard (which was rolled over from a 401K when I was a W-2 and didn’t know better). Also $5k in a Roth IRA at Vanguard which was rolled over from a Roth 401K at said W-2 job because, hey, hypothetically right?
So now to make backdoor Roth IRA contributions without running afoul of the prorata rule, I could open a solo 401K at TD Ameritrade (where funds from an Inherited IRA currently reside) and roll the first two funds above from Vanguard over into it, paying taxes (at what rate?) on the conversion.
Is that right? Is it a smart move financially?
I want to do $11k/year (wife plus self) on top of $55K to solo 401K. This would get me much closer to saving 20% of gross income (will be much easier when the rest of my under 4% student loans are finally gone). Lifestyle is already as thin as we can sustain while retaining our sanity.
Sorry if the answer would be a whole blog post in itself, but I suspect my situation is not uncommon.
No taxes due.
No taxes due, otherwise, sounds like a good plan.
Sure, why not?
I have a similar situation. I just went totally 1099 and have 5 retirement accounts from my W2 jobs. I have a traditional IRA, Roth IRA, 403(b), 401(a), and a 457. I was thinking I would open the solo 401K to rollover the traditional IRA, is that what you did? Additionally, I am interested in making Roth contributions, so how does that fit in?
Also could/should I combine any of the other accounts?
I have such a potpourri of accounts that I’m nervous I’ll screw myself somehow.
You can make Roth contributions each year to the Roth side of your i401(k) and do personal and spousal backdoor Roth IRAs. I’d roll any 401(k), 403(b), 401(a), and governmental 457 money that I could into my i401(k) in your situation to allow ongoing Backdoor Roth IRA contributions.
If you need help to avoid screwing up, contact one of these folks: https://www.whitecoatinvestor.com/financial-advisors/
Some of them specialize in getting you set up and teaching you how to DIY.
Thank you so much!
You mentioned that the employer contribution for 1099 can be up to 20% of net income. Do you mean gross income or AGI?
Net business income is neither gross personal income nor adjusted gross income.
Hi James,
Recently started following the White Coat Investor and am a huge fan.
Can you please clarify your above post as it applies to my situation.
I’m an Emergency Physician. May primary job is payed via W2, although I also did $24,250 of per diem work paid via a 1099 this year.
I’ve already contributed $18,500 to a 403(b) via my primary job (unfortunately no match) and have contributed $5,500 through a backdoor Roth IRA.
Am I allowed to open an individual 401(k) and contribute 20% of the $24,250 = $4,850 for the 1099 pay on top of what I’ve already contributed to the 403(b) and backdoor Roth IRA?
Thanks so much for any clarification.
Best,
Mark
I am a W-2 partner at my practice. We have profit sharing but no 401K; the business also fully funds our HSA. My wife (physician) is a W-2 employee and has a 403B (with healthy employer contributions). I am also a 1099 employee for my side gig, which brings in 10k-15k/year currently although it may grow in the future. Can I create an individual 401k for my side gig? If I contribute the entirety of the 1099 income, then will I get a tax break on all the income from the side gig, as long as I am below 18k?
There is no such thing as a 1099 employee. If you’re an employee, you can’t open your own individual 401(k). If you’re a business owner (i.e. an independent contractor paid on a 1099) then you can. You get one $18.5K employee contribution you can use in any 401(k) you’re eligible for.
Yes, I meant I am an independent contractor paid on a 1099 for a side gig in addition to my main job/practice. This means I can open a solo 401k or SEP-IRA for the contractor work paid by 1099, even though I have a profit sharing plan at my business (but no 401k), my wife has a 403b, and our income is > $400k. Sorry for confusion. Just wanted to make sure that the other retirement accounts or income don’t cancel out the qualifications for solo 401k/SEP-IRA.
No, they don’t.
https://www.whitecoatinvestor.com/multiple-401k-rules/
Thanks for pulling this together and a little more insight on Defined Benefit/Cash Balance Plan as have found it to be a great vehicle assume your income is high enough and your goal is to save a lot over a short period. My income is in the 500-700K range and I have been putting ~200-220K a year for the past three and the overall costs to have everything handled from an admin set up is $2,500. The great thing about this as well as you CAN invest a LOT more aggressively if you want as mine is currently in a long/short hedge fund (some of the others you can only be long securities due to borrow).
On a side, I also have a HSA and have tried many of the ones outlined above over the years as well
Talk a bit about it here as well
https://esimoney.com/millionaire-interview-73/
Careful being too aggressive in the db plan, if you are lucky enough to find yourself in an over funded situation the tax implications can be not nice, http://automatedpensions.com/edu/perspective.aspx?action=view&page=plan%20educator:OverfundedDefinedBenefitPlans .
Plus if you are too successful in the db plan (great problem to have) you’ll find you wont’t have to contribute much and the contributions are kind of the point…..
I moved all my growth to my individual 401K (sold in the db account and bought in the 401K), now the generic market and bond holdings are in the DB to slow down the growth and keep it in track with the cash value.
My experience is that your want this to be a steady account, you don’t want to be underfunded or overfunded. In fact maybe even bond like returns to enable the continued contributions and avoid nasty over-under funding issues.
Defined contribution plan (Individual 401K ) is where you want the high growth, there is no upside cap
A couple clarifications about the independent contractor 401(k). I spent some time in the past year setting up a 401(k) and CBP with Vanguard and this info doesn’t seem to be widely known for some reason.
1. Vanguard only disallows rollovers on its “Individual 401(k)” product. This is the default VG 401(k) for small businesses and is the easiest to set up because the plan document is already pre-written by VG. But it wasn’t that much harder to open a *pooled* 401(k) under VG’s “VRIP” program. I submitted a custom plan document to VG for this product, and then I could write whatever options are legal into that document, including accepting rollovers and a Roth 401(k) option. I am currently rolling over my old 403(b) from Fidelity into my VG 401(k) in this way.
“Write a custom plan document” might sound intimidating, but it’s actually mostly just a lot of boilerplate with your custom options added in. My actuary wrote this custom document for me at no extra charge when I hired him to set up my VG CBP. (He charges $1.5K initial flat fee and $1.7K/y thereafter to maintain the CBP as the Third Party Actuary, which I understand is required by law for any CBP.)
2. If you own a single company with both a CBP and a 401(k), there’s an obscure law that actually decreases the employER contribution limit on the 401(k) by quite a bit. Specifically, if you max out the CBP in a given year, then the employER contribution is limited to profit-sharing only, which Congress has capped at 6% of your salary, *not* the usual lesser-of-20%-or-$36.5K that it would be if you didn’t have a CBP.
Eg, I’m 37 and I set up my LLC S-corp so that my salary will be $220K in 2018. This salary allows me the max CBP contribution of $85K for my age this year. It also means that my 401(k) employER limit is 6% * $220K = $13.2K. Combined with the employEE 401(k) limit of $18.5K, this gives me total new tax-protected space in 2018 of 85 + 13.2 + 18.5 = $116.7K.
Never would’ve figured this out if my actuary hadn’t told me. Guess it’s a good thing the government requires that you hire one to open a CBP.
I have had a similar experience with the VRIP (haven’t done CBP).
If you have a plan document, Vanguard will follow it. I’m in a small group of five, and while no one else uses Vanguard, we are permitted to set up our 401(k) wherever we want.
When I went to Vanguard, they directed me to their VRIP if you have a plan document, Vanguard will follow it. I’m in a small group of five, and while no one else uses Vanguard, we are permitted to set up our 401(k) wherever we want.
When I went to Vanguard, they directed me to their VRIP, and I am able to roll in funds from traditional IRA and prior 401(k) funds as long as they have equivalent tax status.
I have to say Vanguard was pretty confused about the nature of my plan and it took several phone calls and emails over months to set up.
My costs are similar. About $3000 for a group of 5, so $600 each, pretax expense. Seems worth it if you want to go Vanguard
Make ~ $150K as W2 and $350k as 1099, wouldn’t I be better off with SEP IRA? I max 401k at W2 gig and max SEP for 1099. Solo 401k, I would have to reduce the 55k by 18.5k due to W2 401k max contribution?
No. You would NOT have to reduce the $55K plus you could do a Backdoor Roth IRA.
Jim,
Doesn’t the rule state only 1 employEE 401k contribution of $18.5K?
Since this doc is withholding $18.5K at W2, shouldn’t his max contribution to either i401(k) or SEP-IRA will be limited to $36.5K?
No. It is true that the employee deferral limit is exhausted. But that does not reduce the annual addition limit of the solo 401k. Employer contributions and or employee after tax non Roth contributions could be made to completely fill a solo k to the limit.
No. You get one employee contribution of $19K (2019) but each plan has a limit of $56K (2019) of employee + employer contributions. So if you don’t have any employee contribution left, you have to get to $56K using all employer contributions.
Is there max age or max dollars on any of the items listed. Thanks
No max age, but you have to start taking money out of tax-deferred accounts (and Roth 401(k)s as I recall) at age 70 1/2. Max dollars depends on the account.
Roth IRA $5500 ($6500 for 50+)
Individual 401(k) $55K ($61K for 50+ I believe, but double check me)
defined benefit/cash balance plan: Varies by age and other factors, see a professional
Thanks so much for this post. This is exactly what we need.
So I have a few questions.
Right now doing 18.5k to Roth 403b, 18.5k to 457. I also make about 50k year (the second year doing this) 1099 income. I have been doing sep ira about 10k/yr last year and similar plans this year. The first question is does sep ira contributions count to the 55k total you can contribute to 401k?
Second, if I did self 401k what is the max I could contribute? Is it 37k-55k? Would I be able to save more than 20% I save in Sep IRA? I also have several IRA that are spread between Etrade and Fidelity. I wouldn’t mind rolling them into an Individual 401k so I could then do 11k a year in backdoor Roth. They are in different accounts could I do individual 401k in both of these? Or would I have to roll one into the other? I have had these questions for a while so any help would be appreciated.
Thanks
No. Separate jobs/plans. Separate $55K limit.
$10K since you already used the $18.5K employee limit in the 403b and since you only make $50K.
Yes, you could roll the old IRAs and the SEP-IRA into a Fidelity or eTrade individual 401(k).
So let me get this right. I currently receive W2 income at a non profit hospital with a 403b that I use to max out the employee 18.5k slot, as well as the 457 provided. At another hospital I often work locums where I receive 1099 income from a locums agency. I am planning on going with an individual 401k for saving more tax deferred money from the locums/1099 income, as I also do backdoor Roths. Questions:
1. Is it right that because I max the 403b the i401k slot max is 36.5k in a year? Would hitting this max require 182.5k in gross 1099 payments?
2. Is the 20% I can tax defer from this income 20% of gross checks received or is it based on 20% a different schedule C income line (i.e. after other subtractions)?
3. Are i401k contributions deducted on schedule C line 19 when I do taxes or elsewhere?
Thanks for all you do Jim, your site is awesome!
1. Yes. Yes. $36.5K x 5 earned. If you form an S corp, it would still need to earn that much, although it would only need to pay you $36.5K * 4.
1. Yes. Not just gross 1099 payments, but net profit, including the employer share of payroll taxes if you’re an S Corp.
2. 20% of profit.
3. If you’re a partnership or corporation, it goes on those respective returns. If a sole proprietor, it goes on the 1040 line 28
Can you do Both sep IRA and individual 401 (55k +55K for max 110 or is the max of 55k for combination of sep and 401 together?)
No, you get one $55K limit for business(es) that you primarily own.
Hoping for clarification here. I am a partner in a small physician group that is an S corp. Due to cost concerns, we do not have a 401k plan. We do have a profit sharing plan, but the contributions are not that significant. Since my wife works (and has an employer retirement plan), we do not qualify for IRA contributions. I have a side gig with a small amount of income and opened a solo 401k plan for that independent contractor work. Can I open a separate solo 401k (or contribute to my existing solo 401k) for my S corp (W2 income) since a retirement plan is not available and I am a business owner?
No you can’t
Regarding cost concerns for a 401k for the S Corp. Is it that you have lots of non-owner non-highly compensates employees?
And I assume you don’t own more than 50% of the S Corp?
We have 10-15 employees (hourly billing, reception, medical assistant and one office manager) and 4 physicians partners/owners. There is concern that the admin fees would be too expensive. Correct; I only own 25% of the S corp.
The admin fees, recordkeeping, etc fees to run the plan are definitely not going to be too expensive. Think on the order of $3-5k/yr (deductible business expense) for a good plan.
The only “expensive” part is the cost of the employer contributions (owners’ dollars) that you have to give to employee participants in order for the plan to pass the non-discrimination tests.
Too expensive in this regard, maybe, maybe not. Perhaps the profit sharing would be too onerous for all owners to be able to max out the plan ($56k limit 2019). But a safe harbor plan isn’t that expensive and would at least allow you to do salary deferral (plus catch up if over 50) plus some profit sharing with only a 4% match to those employees that choose to participate.
I think it would definitely be worth a consultation with a provider, it costs you nothing but time. I bet you’ll be surprised that it’s not that bad. Especially if you find yourself up in 32% or higher tax bracket.
Question I was an independent contractor last year in 2018. I made less than $18,000 cleaning offices. I contribute to a Roth IRA already and max out at $6500. Can I contribute to another plan because I am an independent contractor or can I only contribute to the Roth IRA. I have a tradional IRA from my previous job could I contribute to that? Or is the only thing I can contribute to is the Roth IRA for the $6500.
Thank you for the help and please let me know if you have further questions.
You should be able to put the rest of your earnings into an individual 401(k). In fact, it could all go into a Roth individual 401(k) if you want. You have to open it before the end of the year though. You might be stuck with a SEP-IRA instead for 2018, less than ideal for various reasons.
No, you only get $6500 total to all Roth and traditional IRAs each year ($5500 if under 50, 6000 for 2019 if under 50, 7000 for 2019 if 50+)
yeah this is one of those beneficial quirks of the tax code where you essentially get to double dip, as you can use those self employment earnings to make an IRA contribution and also deferral contribution of essentially the same dollars to a solo 401k (with the caveat that it’s unfortunately too late to open the plan for 2018).
So if I am understanding you right. I can not put any more money into the IRA’s since I have already maxed out $6500 for my Roth IRA for 2018.. So I can only put more money into a SEP-IRA for 2018 is this correct?
How much can I put into that acct and how would I do this? By contributing to a SEP IRA this will save on what I owe for taxes correct? Since I didn’t have taxes taken out on my earnings?
https://investor.vanguard.com/small-business-retirement-plans/sep-ira
You’ll probably be able to put a little over $3k into a SEP IRA. The figure is 20% of your net self employment earnings, which is business profit less one half self employment tax.
Call Vanguard, they’ll help you. Or Fidelity, or Schwab, or Etrade, or TD Ameritrade. You’ll probably want to make the SEP IRA contribution just before you file your taxes, so that you know the precise contribution allowed, and don’t over-contribute, that’s a problem.
Yes it will save you on taxes. The SEP IRA contribution is deductible.
My biggest concern is making sure that I don’t get hit so hard with taxes since I haven’t paid taxes on my 2018 earnings. Also I will not be an independent contractor again since my circumstances have changed so making sure I don’t get hit hard with taxes and making a contribution to my retirement is important and wanted to make sure I am doing what I can to do that since I already contribute to a Roth IRA I wasn’t sure if I could contribute to something else and hopefully not have to pay as much in taxes. I am married and my husband contributes to his 401 k and to a Roth IRA if that has any bearing on my situation.
Thank you!
All you can do now is a SEP-IRA. You might be able to recharacterize your Roth IRA to a traditional IRA if you really want to lower your taxes. I can’t really tell given I don’t know your other income. Not sure I’d recommend that anyway.
Sounds like $3000 would be the limit I could put into the SEP-IRA? Or can I put more in there? I can claim this amount on our tax return for 2018? So even though I have a Roth IRA, I can set up this retirement account since I was an independent contractor? Correct?
$3000 is not the precise limit. The limit is 25% of self employment compensation, which is also equal to 20% of net self employment earnings, which is equal to self employment business profit (after deductible business expenses) minus one half of self employment tax.
So there are numbers involved in the calculation that only you know. It is best to determine the precise amount when you do your tax return, and make the contribution then. You absolutely do not want to over-contribute. That creates a mess.
So when I our taxes on line – I used credit karma last year, credit karma will be able to figure out what I can contribute from the information on our income income I provide?
Thank you!
I don’t know anything about Credit Karma’s tax software. I know some software can calculate maximum contributions.
So I can have both the Roth IRA and the SEP IRA?
I can have both the Roth IRA and the SEP IRA? Correct?
Yes.
Just stumbled onto your blog and have become hooked. Great info, thank you. I’ve been working 1099 for 6 years, formed an S-corp to pay myself a W2 and take the rest as k1. I have a SEP with a few years of savings, an old Roth for both my wife and I from med school/residency, and a traditional IRA from residency. I’d like to start taking advantage of the backdoor roth, wasn’t aware of this option until your site.
I would have to transition my SEP to an individual 401k correct? What would I need to do with the old traditional IRA from residency? I have to have a zero balance for SEP and the old IRA in order to backdoor from what I’ve read
I will hopefully be transitioning to employed for my main job and will still have side gig 1099 income, but thinking it might be best to dissolve the Scorp at that point to save accounting, business license, city taxes, etc. Thought?
Yes. Roll both the SEP and the traditional IRA into your new i401(k). No big deal. Just remember to get a 401(k) that takes IRA rollovers (i.e. not one at Vanguard.)
The S Corp issue is separate, but if you’re definitely not going to want it going forward, sure, dissolve it and roll the 401(k) into your new employer’s 401(k) or your new i401(k) for your sole proprietorship.
I am bit confused. Just trying to clarify.
I am a W2 employee completely.
My wife had a W2 job through 8/2019 and then will be switching to a independent contract for the rest of 2019 and then fully in 2020. She will be making eventually about 15,000 annually.
Couple of questions;
1.for 2019, my wife already contributed 17,000 to her 401K at the W2 position. Can we do a solo 401K for her new 1099 gig for rest of 2019?
2. For 2020, can we do a solo 401K for a 1099 gig even though she will only make about 15K?
Just trying to get as much as tax protected space for all of our income as possible.
Thanks
1. Yes, but she can only contribute $2K as an employee contribution plus 20% of earnings as an employer contribution there for 2019.
2. Yes. She will then be able to put all $15K in there as an employee contribution.
I am an MD and partner in a small group of 3 doctors. We offer a SIMPLE IRA for ourselves and the employees of our practice.
I also receive income from 1) shares of an ambulatory surgery center, 2) an LLC to lease medical equipment to my practice, and 3) from taking call at the hospital where I operate.
My questions are:
1) If I participate in the simple IRA with my medical practice as an owner/employer, can I set up a different tax-deferred retirement plan for the income that I receive outside of the practice?
2) If I CAN set up a separate retirement plan for myself, which of the sources of income can I include (taking call, ASC distributions, medical equipment LLC)?
It depends. Probably, if you set it up right. Although the first two entities don’t sound like earned income to me, so that income couldn’t go into a retirement account at all. With the third source, it really comes down to whether it is related to the practice by IRS definitions or not. With 3 owners of the practice, it probably isn’t.
Hi all, I’m in my first year contributing to solo 401k for my 1099 income (sole proprietor) as well as 401k through my W2 employer. I’ve contributed the full $19,000 to my W2 employer’s 401k plan. For my 1099, I understand that I can’t make any more employee contributions (right?), but I’m trying to maximize the employer contribution portion. Does anyone know if this is correct…?
(Gross business income – business expenses – 1/2 self employment tax) x 25% = maximum employer contribution?
Or is it 20%?!? I’ve read many, many articles online and still don’t have a great understanding of this… Thanks to all for your help
Yes.
It’s 20% including the employer contribution or 25% not including it. Really the same number.
Thanks so much for your response. Wouldn’t it be the opposite of that (25% after factoring in the employer contribution, 20% without factoring it in)? Or maybe that’s saying the same thing you said. For the math to work the formulas would have to look like this:
(Gross business income – business expenses – 1/2 self employment tax) x 20% = maximum employer contribution
Or
(Gross business income – business expenses – 1/2 self employment tax – maximum employer contribution) x 25% = maximum employer contribution
Those are equivalent numbers in a sole proprietorship.