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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: MPRSearch on January 20, 2014, 07:59:07 AM

Title: 1099 contractor- 401K or IRA?
Post by: MPRSearch on January 20, 2014, 07:59:07 AM
First time poster here and have a question for the group. Does anyone have any thoughts on what would be a better vehicle to use for a tax shelter retirement account?

Let me add a little more here: I had a great year and am paying a lot to uncle sam. I am looking for the best possible retirement vehicle I can still use that would count towards last years taxes.
Title: Re: 1099 contractor- 401K or IRA?
Post by: MPRSearch on January 20, 2014, 02:24:58 PM
looks like I have 3 options. individual 401k, SIMPLE IRA and a SEP IRA. Anyone choose one over the others?
Title: Re: 1099 contractor- 401K or IRA?
Post by: Midwest on January 20, 2014, 02:33:36 PM
Sep allows up to $51k depending on compensation (see attached http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions).

Simple limits are much lower.

Are you sure you still have the 401k option since this is for last year?  Regardless, the limit on an individual 401k + p/s is similar to that of a SEP.  The big advantage to that over the SEP comes into play when using an S-Corp. 

Assuming you want to put significant $'s away or unless you are an S-corp, I'd look @ the SEP.

Midwest

Title: Re: 1099 contractor- 401K or IRA?
Post by: the fixer on January 20, 2014, 08:14:53 PM
I use the SEP IRA. The individual 401(k) would let me shelter more money because I don't earn a ton per year, but I didn't want to deal with the extra work involved. Getting a SEP-IRA started with Vanguard is really easy.

Remember that the SEP-IRA's contribution limit for self-employed individuals is 20% of your income, which is 25% after accounting for the self-employment tax deduction or some such adjustment. It's easy to screw this up because a lot of sources say the limit is 25%, but this doesn't apply exactly to the self employed.
Title: Re: 1099 contractor- 401K or IRA?
Post by: Cheddar Stacker on January 20, 2014, 09:13:58 PM
SEP IRA will likely give you the most available money to shelter depending on your income. As the fixer said, it's 20% of self employed net income. If you only made $20K it will be lower than a SIMPLE IRA would allow. If you made $250K net, you can do up to the $50K limit for all tax deferred vehicles. My numbers aren't perfect, but it should give you an idea of how powerful the SEP IRA is vs. the others. I think the SIMPLE IRA is limited to $12K/year, but not positive on that one.
Title: Re: 1099 contractor- 401K or IRA?
Post by: dandarc on January 21, 2014, 02:54:58 PM
The Individual 401K gives you the most tax sheltered space unless your income is over about 250K, then the Individual 401K and the SEP-IRA become equivalent.  However, I am fairly certain that you needed to have the Solo 401K account set up by Dec. 31, 2013 to make 2013 contributions.  So probably the SEP-IRA for 2013 then.  SIMPLE seems to have lower contribution limits.
Title: Re: 1099 contractor- 401K or IRA?
Post by: jawisco on January 21, 2014, 07:08:52 PM
The Individual 401K gives you the most tax sheltered space unless your income is over about 250K, then the Individual 401K and the SEP-IRA become equivalent.  However, I am fairly certain that you needed to have the Solo 401K account set up by Dec. 31, 2013 to make 2013 contributions.  So probably the SEP-IRA for 2013 then.  SIMPLE seems to have lower contribution limits.

+1

If you don't have full time employees (work more than 1000 per year), Solo 401K absolutely rocks and you can do a Roth or Traditional on top of that.  It isn't very difficult at all to do, but you want to make sure you do it right.