Retirement accounts for 1099 contractors?

[Ann.without.an.e]

I do not own a business but I have 1099 income each year for contract work. I don't quite understand how to set up a retirement account for myself. DH has a 401k through his employer.

It doesn't seem I can have a solo 401k? That would be my preference since it seems the contribution limits are pretty high and I would love to start putting all of my income into an account beginning 2024. I don't have an EIN though and that seems required?

Do y'all have any suggestions?  Thanks 

[maize]

You can start with an IRA; for most people a Roth IRA is best. I believe the current contribution limit is $6500, but you can still contribute for last year if you have money available (last year's limit was I think$6000; double check that). So for last year and this year you could contribute over $12,000. Previous year contributions can be made up until the regular tax filing date of the current year.

Your husband can have an IRA in addition to a 401K, and it doesn't matter whose money goes into the IRA so one easy way to get higher contributions if you want to put more money in than your individual contribution limit would be to open an IRA for each of you and max them both out.

Hopefully someone else will chime in on other self-employed retirement account options, I know they exist but I don't have experience with them. IRAs are super simple to set up though and if you don't have one already that is a great place to start.

 

[vonfirmath]

Just now, maize said:

You can start with an IRA; for most people a Roth IRA is best. I believe the current contribution limit is $6500, but you can still contribute for last year if you have money available (last year's limit was I think$6000; double check that). So for last year and this year you could contribute over $12,000. Previous year contributions can be made up until the regular tax filing date of the current year.

Your husband can have an IRA in addition to a 401K, and it doesn't matter whose money goes into the IRA so one easy way to get higher contributions if you want to put more money in than your individual contribution limit would be to open an IRA for each of you and max them both out.

Hopefully someone else will chime in on other self-employed retirement account options, I know they exist but I don't have experience with them. IRAs are super simple to set up though and if you don't have one already that is a great place to start.

 

I recently learned if you are over age 50 your contribution limit for IRA rises to $7500!

 

[Beth S]

Large online financial companies like Vanguard, Fidelity and others provide self-directed retirement accounts.
Agreeing with the PPs. 
It's helpful to learn a bit about investing first, but the main thing is to open an account, and begin.

ETA = you can start with just a Money Market account, for example.
Stock Market Index Funds are the basic tool used for many personal finance bloggers.

Edited January 12, 2023 by Beth S

[Storygirl]

Check with your bank. DD20 has an IRA through our local credit union. DH and I have ours through the investment company that we use for our other investments.

[Bootsie]

Retirement for Independent Contractors | SoFi

This article gives you a starting place of the different types of accounts whcih indpendent contractors have for retirement.  

[LuvToRead]

Both DH and I have IRA's we contribute too - these are separate from any employment accounts.  We go through Raymond James.  Check your local area to see which investment firms are available. 

Because of the caps it's unlikely you can investment all your income into an IRA.  We also have some non-retirement investment accounts you could ask about.  You will get a much higher rate of return than an ordinary bank account and they can be linked to your bank account so a transfer is pretty easy if you find you need it.  (there are many different types, but a good financial advisor will be able to steer you in the right direction) 

[City Mouse]

Yes for the IRA. I used to be a regular employee contributing to a pension and was not eligible for an IRA. I have been at 1099 contractor for a couple of years, but it did not occur to me to start an IRA right away. I started with an account at the on-line only bank we use for other things. 
I have to admit that I only started the IRA when I realized that it would reduce the amount of income taxes I had to pay.

[plansrme]

You can get an EIN through the IRS website (not a knock-off that looks like it but is not-look for the .gov). It takes 15 minutes, tops. If you are looking to put aside more than the IRA limits, the solo 401(k) is the way to go.

[Ann.without.an.e]

9 minutes ago, plansrme said:

You can get an EIN through the IRS website (not a knock-off that looks like it but is not-look for the .gov). It takes 15 minutes, tops. If you are looking to put aside more than the IRA limits, the solo 401(k) is the way to go.

 

 

Yes, this is why I want the solo 401k instead?  I think beginning next year I would like to put almost all (or maybe even all) of my income into the 401k. Will requesting an EIN trigger some sort of complication in my taxes or require me to have a business license? 

[Ann.without.an.e]

My big picture plan here - DH is 52 and I'm 44. He thinks he will need to retire at 70 because of our age difference and we need to build a larger nest egg but I'm just not sure he can make it that long? His job is very stressful and physically/mentally demanding, but he is in a critical role and it pays pretty good. He contributes to a 401k. Now that we have 3 pretty much on their own financially, I really want to start stacking away more for retirement so that he can retire by 65 instead? I just don't see how he can keep doing his job until 70. It is wearing on him already. He has done it for 20 years and each year he is more tired 😞  I also keep getting hard on the tax side of my income so it seems like putting all/most of what I make into a 401k would be a win-win.

Edited January 12, 2023 by Ann.without.an.e

[Beth S]

Honestly, this was one of my first "Empty Nest" projects. 
Learning the rules/amounts/taxation of Social Security Benefits, Medicare, etc.
Spousal Social Security was a game-changer for me---I thought we'd only get his & my earned benefits.
We're planning to downsize our house, reduce our expenses.
(Repeating a prior post) I went to a local CPA & showed him our "numbers".
His advice was that we'd be fine . . . if we didn't:  buy a fancy car, attempt to bail out our 5 kids . . . OR treat them all to a lavish vacation!

I think your time is well spent learning about what to expect.
(We too have a Caboose, now in college, to consider!)

Edited January 12, 2023 by Beth S

[plansrme]

41 minutes ago, Ann.without.an.e said:

 

 

Yes, this is why I want the solo 401k instead?  I think beginning next year I would like to put almost all (or maybe even all) of my income into the 401k. Will requesting an EIN trigger some sort of complication in my taxes or require me to have a business license? 

Having the EIN is not what causes you to need a business license, but if you need a license, you need a license. They are independent of each other. A business license in my state is $100/year and easy to obtain, but I am in a business-friendly state.

[Bootsie]

51 minutes ago, Ann.without.an.e said:

My big picture plan here - DH is 52 and I'm 44. He thinks he will need to retire at 70 because of our age difference and we need to build a larger nest egg but I'm just not sure he can make it that long? His job is very stressful and physically/mentally demanding, but he is in a critical role and it pays pretty good. He contributes to a 401k. Now that we have 3 pretty much on their own financially, I really want to start stacking away more for retirement so that he can retire by 65 instead? I just don't see how he can keep doing his job until 70. It is wearing on him already. He has done it for 20 years and each year he is more tired 😞  I also keep getting hard on the tax side of my income so it seems like putting all/most of what I make into a 401k would be a win-win.

Is he maxing out how much he can put into his 401K, including his catch-up contribution because he is over 50?  

You will have to file an extra IRS form each year if your solo-401K has more than $250,000 in assets--which probably would not be for a while.  The main drawback is that the administration fees for a solo-401K can be much higher than an IRA or for an employer-sponsored 401K.  

[Ann.without.an.e]

6 minutes ago, Bootsie said:

Is he maxing out how much he can put into his 401K, including his catch-up contribution because he is over 50?  

You will have to file an extra IRS form each year if your solo-401K has more than $250,000 in assets--which probably would not be for a while.  The main drawback is that the administration fees for a solo-401K can be much higher than an IRA or for an employer-sponsored 401K.  

He is not. That is another option but I wondered if having my own account that reduces my business taxes would be more beneficial?

He always at least maxes what they match though.

I feel like any increases either need to be able to reduce my taxes or need to be Roth so that it is tax free in the future but idk? 
 

Edited January 12, 2023 by Ann.without.an.e

[Ann.without.an.e]

4 hours ago, Bootsie said:

...

Wait, I guess him contributing more does reduce our tax load in a round about way too?

 

I have so much I need to learn and then I mentioned it to my brother in finance and he wants to know why we aren't maxing out Roths first. This is why I read on all of this and then retreat lol. 

Edited January 13, 2023 by Ann.without.an.e

[Ann.without.an.e]

50 minutes ago, Beth S said:

Honestly, this was one of my first "Empty Nest" projects. 
Learning the rules/amounts/taxation of Social Security Benefits, Medicare, etc.
Spousal Social Security was a game-changer for me---I thought we'd only get his & my earned benefits.
We're planning to downsize our house, reduce our expenses.
(Repeating a prior post) I went to a local CPA & showed him our "numbers".
His advice was that we'd be fine . . . if we didn't:  buy a fancy car, attempt to bail out our 5 kids . . . OR treat them all to a lavish vacation!

I think your time is well spent learning about what to expect.
(We too have a Caboose, now in college, to consider!)

 

There is so much to know and learn and I honestly get a little overwhelmed. Another good reason to put all that we can into retirement is that most colleges don't look at that the same as savings and we will be older when he is in college. 

What do you mean mean by you "thought you'd only get his and my earned benefits"? Please explain, I may be misunderstanding something too.

Edited January 12, 2023 by Ann.without.an.e

[Bootsie]

8 minutes ago, Ann.without.an.e said:

He is not. That is another option but I wondered if having my own account that reduces my business taxes would be more beneficial?

He always at least maxes what they match though.

I feel like any increases either need to be able to reduce my taxes or need to be Roth so that it is tax free in the future but idk? 
 

If you are married, filing jointly, your federal income tax is calculated on your joint income, so whether an additional $100 in current income is deferred through a retirement plan for you or for him, it will decrease your current tax bill by the same amount.  Any exra dollar you earn is taxed at the same rate as any extra dollar that he has earned.  

A difference in total taxes could occur due to self-employment taxes.  If you work for an employer you pay social security taxes AND your employer pays social security taxes on your salary; if you are self employed, you have to pay your portion AND the employer portion.  But, I think that self-employment tax is calculated before solo-401K contributions, so contributing to your own retirement would not make a difference in that tax bill.  

An advantage to having the money added to his retirement is that since he is older he can withdraw the money sooner without penalty, should should need it.  He will have to begin making required minimum withdrawals from his account sooner than you will, which will impact your tax bill at the time that those withdrawals are made.  

[Ann.without.an.e]

1 minute ago, Bootsie said:

If you are married, filing jointly, your federal income tax is calculated on your joint income, so whether an additional $100 in current income is deferred through a retirement plan for you or for him, it will decrease your current tax bill by the same amount.  Any exra dollar you earn is taxed at the same rate as any extra dollar that he has earned.  

 

This occurred to me after I replied lol and you have a good point on the retirement age and withdrawal. Maybe increasing his is better?

[Ann.without.an.e]

Totally different question for y'all. For medicare I have to be 65? so we will have a medical gap even if he waits until 70 to retire. I feel like it used to say 62 for the spouse but everything I read now says 65. 

[katilac]

Buy something like TurboTax software and you can play around with a lot of alternatives and see what is possible and what works best. 

Run some retirement calculators. 

Consider talking to a financial advisor. We started working with one last year, and chose the setup where we do not pay him a fee and are not required to let him invest a certain amount of our money (but of course his hope is that we place more of our money under his management as time goes on). It's slightly nerve-wracking to give someone so much of your information, but the objective viewpoint is very helpful. 

He told us that most people have a somewhat distorted view of retirement. People with enough retirement savings to suit their plans sometimes worry too much, and, on the flip-side, he often has to tell people that their plans are impractical, and they need to work for years beyond what they hoped for.

I think just knowing what is likely to be possible is very helpful, both for planning and for getting your head in the right space. I don't want to find out that I can't retire at 67 when I'm 66, lol. 

[katilac]

7 minutes ago, Ann.without.an.e said:

Totally different question for y'all. For medicare I have to be 65? so we will have a medical gap even if he waits until 70 to retire. I feel like it used to say 62 for the spouse but everything I read now says 65. 

It's 62 if the spouse has a disability. Plus I'm sure that the age is rising in correlation with the retirement age. 

Also, it doesn't have to be all or nothing. He can retire from the high-demands job but still work at something else. 

That's what my husband plans to do in a few years. Or it might work out well for you to get employment when your youngest graduates. I was 50+ when I made the transition from all contract work to mostly employment (still picking and choosing a bit of contract work). Even a low-paying job can be well worth the while if it provides low-cost, good-quality insurance. 

[QueenCat]

18 minutes ago, Ann.without.an.e said:

Totally different question for y'all. For medicare I have to be 65? so we will have a medical gap even if he waits until 70 to retire. I feel like it used to say 62 for the spouse but everything I read now says 65. 

Medicare is 65. That's why my dh will hold off retiring until he's 68. You may need to get an individual policy for yourself for that gap. 

[Ann.without.an.e]

3 minutes ago, QueenCat said:

Medicare is 65. That's why my dh will hold off retiring until he's 68. You may need to get an individual policy for yourself for that gap. 

If it is 65 then we will either need an individual policy or I will need to seek a job with health insurance. 

[maize]

1 hour ago, Ann.without.an.e said:

Wait, I guess him contributing more does reduce out tax load in a round about way too?

 

I have so much I need to learn and then I mentioned it to my brother in finance and he wants to know why we aren't maxing out Roths first. This is why I read on all of this and then retreat lol. 

Your brother's recommendation is what most financial planners would likely recommend. Yes you pay taxes upfront on funds deposited in a Roth, but you are never taxed at all on earnings --that is a big advantage in most cases over non-roth retirement investment options. And there are no required minimum distributions. 

[KungFuPanda]

1 hour ago, Ann.without.an.e said:

Wait, I guess him contributing more does reduce out tax load in a round about way too?

 

I have so much I need to learn and then I mentioned it to my brother in finance and he wants to know why we aren't maxing out Roths first. This is why I read on all of this and then retreat lol. 

I say start something and then wrap around and learn more.  It's the delay that hurts you.  You don't have to contribute the maximum to start a roth IRA.  Just go to your bank and set it up.  You can do that tomorrow, for a few hundred a month, and have it rolling.  THEN come home and learn and study and figure out what your next move is.  It might be to max out your IRA or it might be something else, but don't let that indecision delay your initial contribution.

[plansrme]

Part of the reason you are getting hit so hard on your 1099 income is that you are paying both halves of FICA and Medicare tax on it. Elective contributions to a 401(k) plan are still subject to FICA and Medicare tax. EmployER contributions are not, and with an incorporated business, there is no reason I can't make all of my retirement contributions as employer contributions and skip the FICA and Medicare. I do not know how that works with an unincorporated employer with a solo 401(k). I could find out, but that would be a good thing to run by an accountant.

Quote

 

 

[Pawz4me]

1 hour ago, katilac said:

It's 62 if the spouse has a disability.. 

Do you have a link for that? I don't think it's correct, but I wish it was.

[Ann.without.an.e]

2 hours ago, Pawz4me said:

Do you have a link for that? I don't think it's correct, but I wish it was.

I read it somewhere too but I can’t remember where. I’ll see if I can find it.

[katilac]

1 hour ago, Ann.without.an.e said:

I read it somewhere too but I can’t remember where. I’ll see if I can find it.

Please do, bc I can't and I was in bloody incognito mode! 

[Ottakee]

The book The Simple Path to Wealth is good on learning more about investing, etc 

[Beth S]

18 hours ago, Ann.without.an.e said:

What do you mean mean by you "thought you'd only get his and my earned benefits"? Please explain, I may be misunderstanding something too.

I worked quite a bit before having kids.  I qualify for Social Security Benefits tied to MY wages.
However, spousal benefits means I qualify for 50% of my husband's SS benefits---depending on the age he & I file to receive benefits.
I think it works for divorcees as well.
Again, lots of rules, but helpful to research . . . b/c it can be a huge game-changer.

Here's a link to My SSA = https://secure.ssa.gov/RIL/SiView.action?URL=%2Fmyssa%2Fbec-plan-prep-ui%2F

[BusyMom5]

There are some tax benefits for 401K and IRA accounts, but also stipulations on when they must be dispersed.   You will be forced to take mandatory withdraws of a certain percentage once you are 70.5 (I think).  

I would start with a Roth IRA (you have until April to open one for 2022) and an investment account for the rest of the money that you want to save or invest.  You can save as much as you want outside of an IRA.  I would also suggest speaking with a tax advisor regarding incorporating your small business and the pros and cons tax-wise for different shelters.   If you do, it will take time to get all the paperwork started.  

[maize]

36 minutes ago, Beth S said:

I worked quite a bit before having kids.  I qualify for Social Security Benefits tied to MY wages.
However, spousal benefits means I qualify for 50% of my husband's SS benefits---depending on the age he & I file to receive benefits.
I think it works for divorcees as well.
Again, lots of rules, but helpful to research . . . b/c it can be a huge game-changer.

Here's a link to My SSA = https://secure.ssa.gov/RIL/SiView.action?URL=%2Fmyssa%2Fbec-plan-prep-ui%2F

Just clarifying here: if you have been married, you likely qualify for spousal benefits. You do have to choose to receive either the spousal benefits or your own earned benefit. For many who have been at-home caregivers/homeschoolers for decades, the spousal benefits will be higher than the earned benefit. You'll want to check before making a retirement election. I believe it is sometimes possible to claim a spousal benefit while still working if your spouse is retired, then switch to your earned benefit when you retire if that is higher. But you can't claim both spousal and personal earned benefits at the same time.

[Ann.without.an.e]

16 minutes ago, BusyMom5 said:

There are some tax benefits for 401K and IRA accounts, but also stipulations on when they must be dispersed.   You will be forced to take mandatory withdraws of a certain percentage once you are 70.5 (I think).  

I would start with a Roth IRA (you have until April to open one for 2022) and an investment account for the rest of the money that you want to save or invest.  You can save as much as you want outside of an IRA.  I would also suggest speaking with a tax advisor regarding incorporating your small business and the pros and cons tax-wise for different shelters.   If you do, it will take time to get all the paperwork started.  

 

My original plan was to just invest some on my own but we have one tagging behind the other three who will be in high school next year (a caboose as @Beth S called it). Since we are insufficient with retirement funds then putting money into a regular savings or a personal investment plan makes it more likely to be factored into what we are supposed to pay for his college, whereas retirement savings (unless it is really high) is not normally taken into account for paying college. I think they assume a pretty good bit of any other sort of savings can be allocated to college payments? So that sort of investing should wait until after he is through college? Someone please correct me if I am wrong. I really do want to better understand this all. 

 

5 minutes ago, maize said:

Just clarifying here: if you have been married, you likely qualify for spousal benefits. You do have to choose to receive either the spousal benefits or your own earned benefit. For many who have been at-home caregivers/homeschoolers for decades, the spousal benefits will be higher than the earned benefit. You'll want to check before making a retirement election. I believe it is sometimes possible to claim a spousal benefit while still working if your spouse is retired, then switch to your earned benefit when you retire if that is higher. But you can't claim both spousal and personal earned benefits at the same time.

Thank you for saying this, this is what I understand too and I was a little confused. 

 

[Ann.without.an.e]

13 hours ago, katilac said:

Please do, bc I can't and I was in bloody incognito mode! 

 

Gosh, I have looked and looked and cannot find this again, but I thought I read it too? ugh  

[BusyMom5]

5 minutes ago, Ann.without.an.e said:

 

Gosh, I have looked and looked and cannot find this again, but I thought I read it too? ugh  

I am not an expert, so hope someone who knows more will chine in, but from what I can tell, FAFSA changes next year and no one really knows how those changes will affect them at this point.   I know for my family that siblings in college are no longer taken into consideration (I will have 2 or 3 in college starting next fall for the next 8ish years).  This change really hits us.  I know retirement funds are considered different than money in a regular fund, but don't think we'd really be considered for Pell grants anyway.  We decided it wasn't worth it to worry about it, since we will likely be out of the target income zone anyway.  We are focusing on our kids going to schools that offer good merit, and getting the scores and background they need to get those scholarships.   

Google changes to FAFSA to learn more.

[Ann.without.an.e]

11 minutes ago, BusyMom5 said:

I am not an expert, so hope someone who knows more will chine in, but from what I can tell, FAFSA changes next year and no one really knows how those changes will affect them at this point.   I know for my family that siblings in college are no longer taken into consideration (I will have 2 or 3 in college starting next fall for the next 8ish years).  This change really hits us.  I know retirement funds are considered different than money in a regular fund, but don't think we'd really be considered for Pell grants anyway.  We decided it wasn't worth it to worry about it, since we will likely be out of the target income zone anyway.  We are focusing on our kids going to schools that offer good merit, and getting the scores and background they need to get those scholarships.   

Google changes to FAFSA to learn more.

 

I had no idea there were changes coming. Dang, the lack of account for siblings in college is harsh on families. I'm really shocked. 

I don't think we would qualify for need aid (for like the pell grant) either, but I need to look it up to confirm, but I know that for schools like Duke (where one of my kiddos went), they would take into account savings and retirement was calculated differently. DD originally received a financial package from them that was pretty good (came out about the same as Carolina for us) but her offers from schools like Davidson, Emory, Rice, etc were a little better. So private schools def have their own little ways of calculating what they think you can pay. They were all within 5-15k of each other. Surprisingly, NC State was our most expensive option since they wanted us to pay the full ticket with them. DD ended up at Duke mostly because she unknowingly was next on the waitlist for a full ride scholarship and she received notification before she had to make her final decision that another kiddo had chosen Harvard, leaving the spot to her. We didn't even know she was in the running so it was quite the shock. 

Edited January 13, 2023 by Ann.without.an.e

[BusyMom5]

2 minutes ago, Ann.without.an.e said:

 

I had no idea there were changes coming. Dang, the lack of account for siblings in college is harsh on families. I'm really shocked. 

I don't think we would qualify for need aid (for like the pell grant) either, but I need to look it up to confirm, but I know that for schools like Duke (where one of my kiddos went), they would take into account savings and retirement was calculated differently. DD originally received a financial package from them that was pretty good (came out about the same as Carolina for us) but her offers from schools like Davidson, Emory, Rice, etc were a little better. So private schools def have their own little ways of calculating what they think you can pay. They were all within 5-15k of each other. Surprisingly, NC State was our most expensive option since they wanted us to pay the full ticket with them. DD ended up at Duke mostly because she unknowingly was next on a the waitlist for full ride scholarship and she received notification before she had to make her final decision that another kiddo had chosen Harvard, leaving the spot to her. We didn't even know she was in the running so it was quite the shock. 

Wow!  That's awesome!  Every school can have their own calculations,  too.  I feel like college costs are a big shell game.  Ive got one on a full ride and my next has tuition covered and 2K toward housing,  and we are hoping for another scholarship!  Hopefully my twins will get some good offers when their time comes!  

 

[Bootsie]

1 hour ago, BusyMom5 said:

There are some tax benefits for 401K and IRA accounts, but also stipulations on when they must be dispersed.   You will be forced to take mandatory withdraws of a certain percentage once you are 70.5 (I think).  

 

The Req Min Distribution (RMD) in most instances for IRA and 401K accounts is now that the first withdrawal needs to be made by April in the year after you turn 72.  This can be a disadvantage of an IRA relative to a Roth IRA, but it isn't a disadvantage relative to just having an investment account.  The RMD means that you must begin paying taxes on some of the money by age 73; if it is simply in an investment account you pay taxes on the money today instead of delaying until you are in your 70s.  Once you take the RMD, you pay taxes on the money, but you can move the money into an investment account (just as if it had been non IRA money) and don't have to spend it on consumption at tht time.  

[Ann.without.an.e]

53 minutes ago, BusyMom5 said:

Wow!  That's awesome!  Every school can have their own calculations,  too.  I feel like college costs are a big shell game.  Ive got one on a full ride and my next has tuition covered and 2K toward housing,  and we are hoping for another scholarship!  Hopefully my twins will get some good offers when their time comes!  

 

That's great 🙂 Thankfully we haven't had to pay too much yet. I don't know what youngest will do. He wants to go to college, for sure. He is very bright and hardworking. While there is a part of him that would love to go to Duke (he spent a lot of time on campus there as a kid and has fond memories), he won't be willing to go into much debt if he gets in and it requires that. He is very level headed and money savvy. We have a pretty good State university that he can go to and commute if necessary and he is willing and happy to do that. He has no desire for the college campus experience so he may choose to commute anyway. We aren't pressuring him into any specific direction.